In our recent podcast series, we discussed insufficient lease term and how this may impact on Equity Release. We have answered common questions surrounding this issue, covering everything from initiating the process, time frames, cost considerations and a lot more in between!

Initial Inquiries

The minimum term a lender will require to accept an Equity Release application does vary from lender to lender. It is usually calculated referenced to the age of the clients at the time they take out their Equity Release mortgage.

If a client has a lease term that is likely to be insufficient to a lender, the best thing for them is to contact their landlord and ask whether they will agree to either extend their lease or sell the client the freehold interest. If the client purchases the freehold interest that means there is no need for a lease term.

Extending the Lease and Purchasing the Freehold. What do these mean?

To break it down, the client can choose to extend their current lease term. This is called a lease extension, the mechanism for this will be a new lease document that will be entered into by the clients and their landlord and, in some cases, the management company. This document will grant a new term of years for the client so that the lease lasts longer.

Alternatively, they may be able to purchase the superior legal interest in the property. This is often called the freehold interest. Essentially, if the client purchases the freehold they become their own landlord, so the lease term is irrelevant. At this point, the client would on the superior legal title, the freehold.

The options available to the client are mainly dictated by the property type. The client can explore their options with the landlord. If both options are available for the client they may wish to obtain a quote for both a new lease term and purchase of the freehold interest. The clients themselves may have a preference as to which they would like to do, but it might be that the difference in price ultimately sways their decision. Generally, it is expected that purchasing the freehold interest could cost the client more than simply extending their lease term.

Does the Lease Extension or Freehold Purchase Need to be Completed Before the Equity Release can Proceed?

No, we can undertake both transactions at the same time. The benefit of this is that the client can then use the Equity Release monies to fund the lease extension or freehold purchase transaction. For example, the price they have agreed to pay their landlord for that additional interest, that money can come from the Equity Release because technically both transactions will complete on the same day.

What if the Client Already has a Solicitor Acting in the Lease Extension or Freehold Purchase?

If this is the case, then we can liaise with those solicitors to, again, synchronise the transactions so the solicitors can continue with their legal work in either the lease extension or freehold purchase. We would undertake the work required in the Equity Release and try to bring everything together at the end. However, if the client does wish to complete their lease extension or freehold purchase before proceeding with the Equity Release, we must remember that the Equity Release work cannot commence until the earlier transaction has been registered at the land registry.

If this approach is taken, it may take some time to wait on the land registry to update their records. The application to register the new lease term or the ownership of the freehold is submitted to the land registry after the completed transaction. The queue for these transactions to be registered at the land registry is approximately 4 months at present. The title records at land registry will need to be updated to the new owner or changes to the term of the lease. It is therefore worth noting the likely time delay when using another solicitor.

Can a Lease Extension or Freehold Purchase be Synchronised With Other Elements of Equity Release?

In theory, yes. If we can undertake the work in each separate transaction, in theory, we can synchronise them and bring them all together.

However, due to there being two separate transactions for us to work on, there is of course more work for us to do and therefore it will take longer than standalone Equity Release. The main issue that can cause delays is the fact that we will be liaising with at least one other party, so the turnaround times are bound to increase further. Whilst we action all of our paperwork promptly we can’t control the action timescales of other parties, so we do often experience delays. For example, the landlord’s solicitors may not provide us with the information we require for say two or three weeks at a time.

Will the Equity Release Lender Have any Additional Requirements?

In most cases, the lender’s solicitors will want to look at the new lease document, the original lease, and the title deeds. They then raise any enquires that they have on this part of the transaction and we then have to deal with those enquires. In some cases, we have to recourse to the landlord’s solicitors. The lender ultimately will not set completion on the Equity Release, lease extension, or freehold purchase until they are happy with all of the documents and title position.

Client Costs

We charge an additional fee of £1749 +VAT when undertaking the conveyancing work for the lease extension. There are also other costs involved that the client will want to be made aware of.

During the quoting process with the landlord, where the client negotiates their new lease term or their purchase of the freehold, they might charge the client an administrative or valuation fee for their costs in assessing this purchase price. These are usually in the region of £200 – £500. Bear in mind, we previously mentioned registering the new lease term or purchase of the freehold at the land registry so there will be an additional land registry disbursement for that. This usually in the region of £200.

Also, the client will have to pay the landlords legal fees which are usually payable upfront. The landlord will want to make sure that they are not out of pocket for commissioning their solicitors and asking them to prepare their new documents. In a lot of cases, we do have to ask clients to pay these landlords legal fees which can be in the region of £1,500, and often have to be paid before the landlord will release any draft documents.

Consequently, it is important that the client has some budget in the Equity Release deal to allow for additional costs. The costs above are common in every case. Additionally, in some cases, the landlord might also charge for provision of the information that the lender will require. For example, about the running of a building that is a block of flats, service charge, or ground rent. That could be a couple of hundred pounds as well, so there can be quite a few disbursements that the client will need to be prepared to pay if they want to proceed.

While fees can seem like they are mounting up, it does vary in every case. Sometimes they are less and sometimes they are more, and sometimes they are not all payable. We make sure to take the client though that step by step.

Contacting the Client’s Landlord in the Initial Stages

The client will be required to contact the landlord as soon as possible. Ultimately, no solicitor is going to be able to progress the lease extension or freehold purchase until they have the draft documents from the landlord’s solicitors. The client will need to obtain a quote from the landlord and formally accept this so the landlord can then instruct their solicitors to release the draft documentation to us.

The time frame of this can depend on how well the landlord cooperates with the client, which is why we ask the clients to take these steps as soon as possible. You can think of it as being akin to purchasing a property. For example, you can’t instruct your conveyancer to undertake the legal work on your property purchase until the formal offer and acceptable part of the process has been completed with the seller. This is often via an estate agent on purchase cases. Both parties then instruct a solicitor to commence the legal work. It is essentially the same for a lease extension or freehold purchase.

Clients can choose to involve us as soon as possible. However, if you do instruct us and apply for a mortgage for them, it is important they are fully aware that no one will be able to proceed with the application until they have agreed their leasehold extension or freehold purchase with their landlord. If they are happy for you to instruct us anyway, that is fine, but they should be well aware that the file will remain on hold until they have done that.

Statutory Lease Extensions

This means that, rather than negotiating the price for the lease extension with the landlord or to purchase the freehold, the client can evoke a procedure under the leasehold reform act. This procedure is set out in legislation and contains provisions for papers being served within specific time limits, for example. In some circumstances, a statutory lease extension may be more advantageous, depending on what the landlord is offering in the negotiation process.

If the landlord won’t negotiate at all, then the client may have no other option than to force the landlord to sell them a lease extension via the statutory process. They are a very complex area of law and we always advise that the client seeks specialist advice from a property lawyer who specialises in these types of applications. Unfortunately, Equilaw cannot advise on this. That being said, we do have conveyancers within our team that will undertake the work required in a leasehold extension, or purchase of freehold, so long as it proceeds by way of negotiation.

What Happens When Clients Hold Their Freehold Under the Guise of a Management Company?

We would usually deal with another director or the company secretary being the landlord i.e the other party in the transaction. If the client owns the freehold jointly with another person in the building, we would ask that other party to act as the landlord’s capacity in our transaction. In essence, the clients cannot sell themselves a legal interest and nor can they grant themselves a new lease term. However, we will normally try and find a way around this by inviting other parties to act as the landlord.

Useful Information for Advisers to Gather

Straight away, we want to make sure that we are communicating with the client effectively. It helps us to know whether the client is aware that they will need a lease extension or need to purchase their freehold. If so, have they have taken any steps to discuss an offer with the landlord? If a client doesn’t have an offer in place, we can still accept the instruction, as previously mentioned. However, we will need to put the file on hold until we’re contacted by the landlord’s legal team with copies of paperwork that we need to progress.

At the beginning it’s very much a question of communication, making sure the client is aware of that stage of the process and making sure that we have the full information needed to communicate with the client effectively.

Key Points

• Firstly being clients need to talk to their landlord.
• They then need to obtain an offer.
• Once that has happened it’s probably a good idea to get Equilaw involved to do the rest.