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Residential Leasehold

Stopping Or Delaying Leasehold Forfeiture: Mortgagee Protection Clauses

Learn how adding a mortgagee protection clause to your lease can help to stop leasehold forfeiture by delaying proceedings. Read this blog post.

Stopping Or Delaying Leasehold Forfeiture: Mortgagee Protection Clauses

Forfeiture Of Leasehold Property

Imagine losing your leasehold flat worth hundreds of thousands of pounds – simply because you had fallen behind on payment of ground rent or service charges.

The freeholder could legally seize the leaseholder's home and sell it. Meanwhile, the leaseholder is left with nothing. No home, no roof over their head, no compensation for their loss – nothing. This is the result of forfeiture.

In recent years, courts have been loath to grant forfeiture orders for obvious reasons. The courts are mindful that leaseholders will have invested significant funds into their flats and will wish to give them plenty of opportunity to remedy the breach or non-payment. 

So leasehold forfeitures are very rare – but they do happen from time to time. And as an experienced leasehold solicitor, I’ve seen them happen. But there is a way for leaseholders to protect themselves. They can ask for a mortgagee protection clause to be added to the lease.

Forfeiting The Lease 

Forfeiture is the legal process through which a freeholder/landlord seeks to terminate the lease and repossess the property due to the leaseholder/tenant’s non-compliance with the lease terms. Common breaches that may lead to forfeiture include:

  • non-payment of ground rent or service charges
  • unauthorised alterations to the property
  • other significant violations of the lease agreement.

The process of forfeiture usually involves the freeholder serving notice on the leaseholder, giving them a specified period to remedy the breach.

If the leaseholder fails to address the breach within the given timeframe, the freeholder may then apply to the court for a possession order. If granted, this order allows the landlord to take back possession of the property.

Forfeiture is a serious legal action, and the courts have the discretion to grant relief to the leaseholder in certain circumstances. This means that even if a breach has occurred, the court may allow the leaseholder to remedy the situation and retain the property. Relief from forfeiture may be subject to the leaseholder compensating the freeholder for any losses incurred due to the breach.

How A Mortgagee Protection Clause Works

A mortgagee protection clause can be added to the lease. It is designed the protect the mortgagee (lender).

But in doing so, it also helps to buy time for the leaseholder. This is because the clause compels the freeholder to give the lender 28 days’ notice before they can start forfeiture proceedings to repossess the property. They cannot begin forfeiture proceedings without first serving written notice on the lender.

Those 28 days can give the leaseholder vital breathing space in which to rectify the breach(es). Usually this means giving them time to pay off the arrears.

So what’s in it for the freeholder? At face value, it sounds like yet another procedural hurdle. So why would a freeholder agree to such a clause being added to the lease?

For a start, it shows the court that the freeholder:

  • has not considered the forfeiture option lightly
  • is behaving as a responsible landlord left with no option but to consider forfeiture.

It also sets a 28-day clock running – giving the leaseholder one last chance to remedy the breach(es). This countdown can be quite effective: the threat of impending forfeiture can concentrate the leaseholder’s mind and prompt swift action.

This can result in rapid resolution of the dispute – saving the freeholder the time and cost of legal action in a court that is mindful of the wider consequences of taking away the leaseholder’s ownership of their flat. As previously stated, these forfeiture cases are rare because the outcome for the leaseholder can be so draconian.

How To Add A Mortgagee Protection Clause To The Lease

In our experience, most leasehold property buyers are initially unaware of the benefits of mortgagee protection clauses. They contact us only when the mortgage lender makes a protection clause a condition of the loan.

And it’s at this point that the leaseholder discovers how amenable the freeholder is (or isn’t).

The leaseholder and lender may need the freeholder to agree to a Deed of Variation that adds a mortgagee protection clause to the lease. This is also a good opportunity to consider whether any other clauses in the lease also need to be reviewed.

Deeds of variation will have a cost to them but – from a leaseholder’s point of view – it can be worth them seeing whether they’ll need one in advance. This avoids the issue arising at the point of sale when time pressures can be significant. 

But here’s the issue: the freeholder has no direct interest in whether the clause is added or not. It’s not their problem – it’s the leaseholder and the lender who need to worry. The freeholder can do nothing and would be within their legal rights to do so.

Some freeholders may wish to help the leaseholders by granting a deed of variation to add the mortgage protection clause. While the freeholders may not stand to benefit from the clause itself, they may consider that they are not adversely affected either.

Get Expert Legal Advice On Leasehold Forfeiture And Mortgagee Protection Clauses

For expert legal advice, contact Coles Miller Partner Nick Leedham who specialises in residential leasehold property matters.

His areas of expertise include forfeiture, mortgagee protection clauses, varying leases, buying the freehold, extending the lease, service charges (reasonableness and recovery), Right to Manage and Right of First Refusal.

Nick is based at our Bournemouth office.

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