Forfeiture Cases On The Rise

It has been widely reported that lenders are expecting a rise in the number of homeowners handing back their keys as the cost-of-living crisis forces borrowers to default on their loans. Businesses, particularly SMEs, are also reported to be struggling to meet the business demands in a tightening market.  

Defaults will not only be seen in relation to monthly mortgage and loan payments but also in relation to service charge and ground rents owed under leases for property. These are expenses that have increased significantly in the last couple of years. If these costs are not paid, the landlord can seek to forfeit the lease, which extinguishes the borrowers interest, and critically, removes the lender’s security. This would leave a lender with no property to repossess, or no asset to sell, in order to recover the sums owed. 

Forfeiture

Forfeiture is the right of a landlord to terminate a lease in the event of a tenant breaching a covenant in the lease. This is commonly used as a remedy when the tenant has defaulted on monies due to the landlord, i.e., monthly rental payments, service charges and or ground rent monies. Other breaches could include failing to keep the property in a state of good repair and condition, which may be a consequence of limited funds being available to spend on maintenance. 

Providing the lease allows for forfeiture, landlords can take the necessary steps to terminate the lease. This can be done by either court order or peaceable re-entry (for properties let other than a dwelling) to obtain possession of the property. Once the claim for possession has been issued, or the property peacefully re-entered, the lease is forfeited, i.e., it ceases to exist and the property reverts to the landlord’s ownership. 

How can a lender protect their security? 

Lenders are entitled to apply to the court for relief from forfeiture, but there is action that lenders can take before they get to this stage. 

A common solution to protect the security and avoid forfeiture proceedings, would be to pay such sums that have accrued and to apply the same to the borrower’s mortgage/loan account. The mortgage/loan terms and conditions would need to be carefully considered but most have provisions that allow the lender to take action to protect their security and to pass these costs on to the borrower. This solution is only possible if the lender is notified, in advance of forfeiture, that these sums are outstanding. Unfortunately, this is not always the case. 

A further consideration of taking this action, particularly in the current market, is that the borrower may become reliant on the lender to repeatedly pay such costs. This could have a significant impact on the equity available to repay the sums owed to the lender and impact on the borrower’s general affordability.  

If pre-emptive action is not possible, and the lender learns that their security has been forfeited, then they must apply to the Court for relief from forfeiture. Once a lease has been forfeited, it cannot be reinstated without an order of the Court. The Court will usually only grant relief if the breach can be remedied, i.e., if outstanding sums owed are paid or if it can be shown that the landlord has waived their right to forfeit. 

A lender, if applying for relief on behalf of the borrower, would usually have to be willing, and able, to remedy the breach (or argue waiver). If they are able to do so, the Court will likely grant relief on the condition that the breach is remedied within a set time period. This can be agreed with the landlord in advance, and a consent order filed, but it must be sealed by the court for the lease to be reinstated. 

Alternatively, and once a lender becomes aware that the borrower is not meeting the demands under the lease, and their security is at risk, they can look to enforce the terms of the mortgage/loan themselves and look to realise their security - by way of mortgage possession proceedings, enforcing their power of sale, appointing Receivers of rent, etc. This will allow a lender to retain some control whilst preserving the security and ultimately recovering the outstanding debt owed.  

What to expect

The moratorium imposed by the Commercial Rent (Coronavirus) Act 2022 has long since been lifted and we have seen the number of forfeiture instructions progressively increasing and accelerating since the start of the year. 

The Supreme Court have recently issued a favourable decision for landlords to compel tenants to pay any service charge (following service of a service charge certificate) that is due straight away to comply with the terms of the lease (Sara & Hossien Asset Holdings Ltd v Blacks Outdoor Retail Ltd).  This is true even if the tenant wishes to challenge the sums owed, e.g. if the landlord wants to carry out repair works to the property and the tenant doesn’t agree they are necessary and/or that they will cost what the landlord has forecasted them to cost, they will have to pay the sums regardless. 

The tenant does not lose the right to challenge the sums, and indeed can do so, but this must be done after the payment has been made – a concept termed “pay now, argue later”. A failure to make the payment (however large it is) would be in breach of the lease and leave the landlord free to forfeit the lease.  This could place a tenant in difficulty, if faced with a large service charge demand from their landlord, that they cannot afford and/or that they wish to dispute. In this situation, if a tenant does not pay, and the lender steps in, they would need to “pay now, argue later” which is no small undertaking for a lender. 

Conclusion

Preserving their security is at the top of every lender’s to do list. Forfeiture poses a real risk to a lender’s security and is a tool used by landlords more frequently when the country is in a recession, or a period of economic difficulty. It is therefore something that a) in these uncertain economic times lenders must be alert to and b) if they find themselves in a situation where this threat becomes a reality, they must act quickly to seek legal advice in order to best protect and preserve the security held. 

* Kate Rigby is a partner in the Dispute Resolution Group of London-based law firm Rosling King LLP, with particular expertise in the fields of commercial litigation and real estate litigation *

https://www.landlordtoday.co.uk/legislation-and-compliance/2023/2/forfeiture-cases-on-the-rise--landlords-rights

Pandemic property boom added £100k to price of detached homes

Race for space fuels bidding wars among buyers

ByRachel Mortimer

Detached houses are now worth £100,000 more than before the pandemic, after demand for bigger homes pushed up prices.

House prices across the board rose by a fifth on average between the beginning of 2020 and end of 2022, climbing from £237,895 to £286,515 during the pandemic boom, according to analysis by lender Halifax.

But detached homes grew in value more than all other property types, fuelled by a race for space which locked buyers into bidding wars for homes with more rooms and bigger gardens.

Detached houses outpace other property growth

Bar chart with 5 data series.

Average price growth across property types

The chart has 1 X axis displaying values. Data ranges from 2020 to 2022.

The chart has 1 Y axis displaying £ thousands. Data ranges from 142.792 to 453.07.

DETACHED HOUSES OUTPACE OTHER PROPERTY GROWTH

Average price growth across property types

End of interactive chart.

Detached house prices jumped by around a quarter in the three-year period, rising from £359,725 in January 2020 to £453,070 in December 2022, in an acceleration away from longer-term trends. 

Prices for standalone homes rose by just 8.8pc in the three-year period before – between 2017 and 2019 – and in January 2020 had grown by just 1.7pc year-on-year, compared with a growth rate of 4.1pc for flats.

Increases in the market value of more spacious houses have dwarfed jumps in the prices of smaller property types in the three years since. The average price for a flat rose by 13.3pc between 2020 and 2022, while the value of terraced houses jumped by 21pc and the price of semi-detached houses climbed by 23pc.

Kim Kinnaird, of Halifax, said the pandemic had transformed the property market and triggered a “huge step change” in house prices.

“Heightened demand created a much higher entry point for bigger properties right across the country, and that impact is still being felt today by both buyers and sellers, despite the market starting to slow overall.

“Even if the average detached property price now fell by 10pc, it would still be around £50,000 more expensive than before the pandemic," he said. 

Owners of detached houses in Greater London, the South East and South West, eastern England and the West Midlands all gained more than £100,000 on the price of their homes between 2020 and 2022, the bank said. 

The biggest gain was in the South East, where the average price of a detached house jumped by more than £136,000 to reach £637,292 in December 2022.

Homeowners in Greater London gained more than £122,000 in the three-year period, with the average detached house price rising to £903,278. In the South West the average detached property price rose by more than £115,000 to £490,066.

In the West Midlands, the typical detached house cost £431,257 in December 2022 having climbed by more than £104,000 in the three years prior. Meanwhile homeowners in the East gained a little more than £100,000, with the average detached house price rising to £536,577.

https://www.telegraph.co.uk/property/house-prices/pandemic-property-boom-added-100k-price-detached-homes/

Third of landlords could be forced to sell up after failing their lender’s affordability test to remortgage

One in three buy-to-let landlords are struggling to remortgage after failing their lender’s affordability test, warns Mortgages for Business.

Fresh research by the buy-to-let specialist, carried out on behalf of the Daily Mail, found that some investors are being forced to accept variable rates as high as 9.5% as a result of failing affordability tests for remortgages. Others are selling up because they can no longer afford their loans.

Gavin Richardson, MD of Mortgages for Business, said: “It’s a critical situation for small landlords at the moment. They are worried about Section 21 reform and EPC regulations and tax.  On top of that, they’re having to worry about higher mortgage rates.  They’re right to be worried.

“We’re seeing landlords coming off rates of 3.5% and being unable to remortgage because, according to the lender’s stress test, their loan is no longer affordable. Unable to secure a new deal and with nowhere else to go their loans are reverting to the lenders standard variable rate, which average about 7.5%.

“In fact, in the worst case scenario, they are moving to their lender’s standard variable rate at rates as high as 9.5%. Their only other options are to pay a socking-great fee to secure a more reasonable interest rate, which can cost them tens of thousands of pounds.  Or they can sell up and go home.”

“The money markets are proving tricky for lenders to navigate and many are sticking with ‘computer says no’. Having a good broker has never been important,” he added.

Author : MARC DA SILVA

https://propertyindustryeye.com/third-of-landlords-could-be-forced-to-sell-up-after-failing-their-lenders-affordability-test-to-remortgage/

House prices hit record high but Halifax predicts cooling UK demand

Average for October reaches £270k but lender expects interest rate rises to affect borrowing

Halifax said the average cost of a home rose by 0.9% in October, the fourth month in a row in which prices have risen. 

UK house prices rose for a fourth month running in October, climbing above an average of £270,000 for the first time on the Halifax measure, but the mortgage lender predicted a cooling of the market in the months ahead if the Bank of England raises interest rates.

Halifax said the average cost of a home rose by 0.9% on the previous month, after rising by 1.7% in September, adding more than £2,500 to the value of a typical British home.

It pointed to several market drivers, including first-time buyers supported by help with deposits from their parents, improved access to mortgage deals and low borrowing costs.

“One of the key drivers of activity in the housing market over the past 18 months has been the race for space, with buyers seeking larger properties, often further from urban centres,” said Russell Galley, managing director at Halifax. “Combined with temporary measures such as the cut to stamp duty, this has helped push the average property price to an all-time high.”

House price growth continue to remain strong despite the phasing out of the government’s stamp duty holiday at the end of September. The annual rate of house price inflation – 8.1% compared to the same month last year – was the strongest since June.

Wales continues to experience the strongest house price inflation in any UK nation or region, climbing 12.9% in October to an average of £198,880. The average price of a property in Scotland rose 8.6% year-on-year to £190,000.

In England, the north-west has returned to being the strongest-performing region, overtaking the south-west, with a rise of 10.4% – the highest rise for four months – and an average price of £205,881.

London continues to show the weakest growth: house prices rose just 0.8%, a fall from 1% in September, the lowest level seen since February 2020.

While the Bank of England decided on Thursday to keep interest rates at historic low levels, Halifax expects imminent rises and therefore an increase in borrowing costs for homebuyers.

“With the Bank of England expected to react to building inflation risks by raising rates as soon as next month, and further such rises predicted over the next 12 months, we do expect house-buying demand to cool in the months ahead as borrowing costs increase,” said Galley. “That said, borrowing costs will still be low by historical standards, and raising a deposit is likely to remain the primary obstacle for many.

“More generally, the performance of the economy continues to provide a benign backdrop to housing market activity. The labour market has outperformed expectations through to the end of furlough, with the number of vacancies high and rising relative to the numbers of unemployed.”

'House prices hit record high but Halifax predicts cooling UK demand' by Mark Sweney, https://www.theguardian.com/money/2021/nov/05/house-prices-hit-record-high-as-halifax-predicts-cooling-uk-demand 

Capital gains tax could ‘be brought into line with income tax rates’

Capital gains tax (CGT) increases could be around the corner as the chancellor Rishi Sunak looks to find the money needed to cover the government’s unprecedented spending and borrowing during the pandemic.

Given that the prime minister Boris Johnson has already ruled out a return to “austerity” in public spending, this money will have to come from somewhere.

There has been speculation for some time that CGT rates would increase.

Anthony Codling, CEO, twindig, commented: “As we enter 2021 chancellor Rishi Sunak is reviewing the structure of UK taxes. The pandemic has been costly in both emotional and economic terms, UK government debt is at an all-time high and eventually, these debts will need to be repaid. Taxes are therefore likely to rise.”

CGT is currently charged at 20%, but there are growing calls that it should be increased to 28% across the board or possibly aligned to income tax rates – at up to 45%.

The government’s tax adviser recently recommended that CGT be overhauled with proposals that could see the number of people hit by the duty increase sharply.

                                                          Anthony Codling

Rishi Sunak, who commissioned the review, is considering proposals by the Office of Tax Simplification (OTS), a Treasury-based body, to reform capital gains tax in the light of the economic and fiscal impact of the Covid-19 crisis.

The move has the potential to bring in an extra £14bn by reducing exemptions and doubling rates, according to the review.

Codling said: “Our working assumption is that capital gains tax rates will be brought into line with income tax rates, higher rate taxpayers will therefore pay higher rates of capital gains tax.”

Currently, a taxpayer’s primary residence is exempt from capital gains tax, but this could soon change for some homeowners.

He added: “We do not expect this exemption to be taken away completely, but we would not be surprised if the amount of exempt gain was subject to either an annual cap, a lifetime cap or a combination of both. This would be similar to pension relief where the amount of tax benefit in any one year is capped as well as the taxpayers lifetime tax benefit.

“Second-home and buy-to-let property gains are already subject to capital gains tax at a higher rate [28%] than the capital gains on other assets [20%]. We forecast that these rates will be equalised and reflect the taxpayer’s income tax rates.

“This will mean a tax rate increase for higher rate taxpayers and a lower tax rate for those with earnings below the higher rate tax threshold. However, it is likely that a capital gain on a property will move a lower rate income taxpayer into the higher rate tax bands.”

'Capital gains tax could ‘be brought into line with income tax rates’' by Marc Da Silva, https://propertyindustryeye.com/capital-gains-tax-could-be-brought-into-line-with-income-tax-rates/

New private rental electrical safety standards: What you need to know

New regulations on electrical safety standards for private rented accommodation have come into effect. Here is what landlords need to know.

The ‘Electrical Safety Standards in the Private Rented Sector (England) Regulations 2020’ is part of the Ministry of Housing, Communities and Local Government’s (MHCLG) drive to ensure all housing in the private rented sector is safe for tenure.

Landlords must ensure the electrical installations within their properties are safe and inspected by a qualified person at least every five years, and must ensure an Electrical Safety Condition Report (EICR) is produced following the inspection and provided within the designated timeframes.

These new regulations came into effect on 1st June 2020, and apply to new tenancies from 1st July this year and existing tenancies from 1st April 2021.

Who can carry out the inspection?

The regulations require the inspection to be completed by a ‘qualified and competent person’ at least every five years. It is the responsibility of the landlord to ensure the electrician selected is qualified, and that they are qualified to current Wiring Regulations – BS 7671.

A reliable way to ensure this is to choose someone who is a member of a competent person scheme, such as the National Association of Professional Inspectors and Testers (NAPIT) or National Inspection Council for Electrical Installation Contracting (NICEIC).

What will be inspected?

All ‘fixed’ electrical parts of the property must be inspected and tested, such as the wiring, the socket-outlets, light fittings, and any permanently connected electrical equipment such as showers and extractor fans. It does not cover other electrical appliances supplied as part of the tenancy (cookers, fridges and televisions) or any items owned by the tenant.

However, the government recommends that landlords undertake PAT tests on these to ensure safety.

Reporting

An Electrical Installation Condition Report (EICR) should be provided, detailing the findings of the inspection and the next due date for inspection.

For any areas of the installation that do not meet the standards set out in the current Wiring Regulations, the person inspecting the property will classify it with the following codes:

Code 1 (C1): Danger present. Risk of injury.

Code 2 (C2): Potentially dangerous.

Further Investigation (FI): Further investigation required without delay.

Code 3 (C3): Improvement recommended. Further remedial work is not required for the report to be deemed satisfactory.

What action must be taken?

If any part of the installation is classified as C1 or C2, remedial work must be carried out to remove the danger and risk of injury, and must be followed up in writing before the report is issued. Other remedial work and further investigation must be completed within 28 days, or sooner if indicated in the report. Once the work has been completed, landlords must supply the tenant and local authority with written confirmation from the electrician. This process must be repeated until the electrical installation is found to be compliant.

Once the installation is declared safe for continued use, landlords must supply a copy of this report to the tenant within 28 days of the inspection and to a new tenant before they move in.

With the new electrical safety standards in place, landlords are now entirely responsible for the safety of installations within the property. It is important that landlords spend time to understand the new regulations, as they contain obligations they will need to meet moving forward.

Dominick Sandford, is the head and director of merchandising and marketing at ElectricalDirect.

Reference: Dominic Sandford, 'New private rental electrical safety standards: What you need to know', https://www.landlordtoday.co.uk/breaking-news/2020/9/new-private-rental-electrical-safety-standards-what-you-need-to-know 

Mortgages still in lockdown despite stamp-duty holiday

Low-deposit home loans are coming back… but choices are limited and lenders are applying new terms and conditions.

These are difficult times for anyone who wants to buy a home. Despite the government’s attempt to reinvigorate the market with a temporary stamp-duty holiday on properties costing up to £500,000 in England and Northern Ireland, unless you have a large deposit you could face a struggle.

During the crisis lenders have pulled mortgages, with those for borrowers with small deposits disappearing fastest. Some of the big banks and building societies have started to return to the market – last week saw 90% deals launched by Coventry building society and Metro Bank, and, from Monday, Nationwide building society will also be offering them.

But the choice is still limited, and lenders are asking a lot more questions than they were before lockdown.

What’s on offer

Since lockdown, the number of mortgages on the market has plummeted by almost half. Most deals that have gone are those where buyers need a deposit of 5% or 10%. According to financial data firm Moneyfacts, in March there were 779 products for borrowers with a 10% deposit, while the figure is now closer to 70.

For those with 5% deposits, the options are even narrower – in March there were 391, now just 14, and many of those are specialist products, says Eleanor Williams from Moneyfacts.

“This includes guarantor and family-assist mortgages, such as Barclays’ Springboard mortgage, and those open only to applications from selected professions, or from those in specific lending areas, such as those offered by Furness Building Society that reflect its principles as a mutual to continue to support those in their local area,” she says.

Matters are made worse by low interest rates, she says, which mean anyone saving is not seeing their money grow.

The stamp-duty holiday will give extra cash to movers and to first-time buyers spending more than £300,000. But for many, it won’t make up for the loss of 95% mortgages, says Simon Gammon, managing partner of mortgage broker Knight Frank Finance. “The stamp duty cut is not going to make that up, so, if anything, it is more frustrating for first-time buyers,” he says.

Blink and you miss it

With little choice at 90%, borrowers have needed to be on the ball to get their hands on the few mortgages that are available.

Coventry building society came back into the 90% mortgage market early last week, but not for long – it took applications for the deals between 8am on Tuesday and 8pm on Wednesday, saying the flash sale was to ensure good customer service.

Other lenders are taking a different approach to rationing mortgages. HSBC has been offering 90% home loans throughout the crisis but, since April, has limited the number of applications it accepts each day. “A small number of lenders cannot take all the business at higher loan-to-values and hence this action has been necessary,” says the bank. “We will, of course, continue to review the situation regularly and hope it isn’t too long before the market returns closer to normal.”

Nationwide building society will return to the high loan-to-value mortgage market from 20 July, with a 90% mortgage for first-time buyers. It’s re-entry is expected to be a game-changer. It has promised not to limit the number of mortgages available each day, and, as the country’s largest building society, should have more capacity to cope than smaller lenders. Metro Bank, too, has put its 90% home loans on more general release, and is not restricting them to new borrowers.

More questions

Anyone who wants a mortgage at a high loan-to-value should expect a lot of questions. Most lenders have added new terms and conditions to their deals, increasing the number of hurdles would-be borrowers need to get over.

“You are going to have to be a good-quality borrower to access a 90% mortgage,” says David Hollingworth of mortgage brokers London & Country. So anyone looking to remortgage or move may be asked if they have taken a payment holiday. “If you say ‘yes’, you can expect a more forensic examination of why,” says Gammon. “The same would apply if you have been furloughed.” He says he has not seen lenders say upfront that they will not take on borrowers who have taken a payment break, but, after scrutiny, some have been unable to borrow as much as they hoped.

Coventry building society is clear about furloughing: it is only willing to offer loans of up to 65% of a property’s value to anyone currently paid through the scheme. Metro Bank has also ruled out furloughed applicants for these deals – and when you return from furlough you must have evidence of three months’ full pay to apply.

Borrowers may also face more questions about how they raised the money for their deposit. Although help from other people is still allowed, at Nationwide, buyers will only be able to take out a 90% mortgage if they have contributed to the down payment themselves.

Lenders are also asking for more from self-employed borrowers. “Back in February lenders would ask for three years’ business bank statements and base the lending on that,” says Gammon. “Now they want statements for the last three months to see how your business has been trading.” Hollingworth says lenders are keen to see “what income can be evidenced”. For the self-employed or anyone furloughed and on a reduced income this could mean being offered a mortgage based on this sum, rather than what you would expect to earn normally.

A frustrating future

It will be some time before mortgages which require only small deposits will return, said Gammon.

“I don’t envisage lenders rushing back to the 95% mortgage market – they will want to see what happens as the furlough scheme unwinds, and also what happens to prices,” he says.

“I don’t think 95% mortgages are going to be back before the end of the year.”

Case study: ‘Every little bit counts’

Niamh Spence is looking for a house near Manchester. The 29-year-old PR manager is selling a property she bought with an ex-partner and hoping to move into a place of her own.

“I’m looking at around the £130,000 to £140,000 mark so I will benefit from the stamp duty cut. Every little bit counts, so I’m pleased about that. If you think before lockdown there were 95% mortgages, I’ve had to find extra for the deposit to meet the new requirements of lenders only supplying 85%. The problem is, there are barely no mortgages for 10% deposits and it’s so competitive – my broker says that if you don’t get in first thing in the morning you can’t get one from banks such as HSBC.”

Spence is currently furloughed, which hasn’t helped. “My mortgage in principle is based on me being on a furlough wage. Until I get back to work I can’t borrow any more, so I’m looking for something based on what I can do currently.

“I know plenty of people who are in the same position and I’m lucky to be returning to work as I know there are many who are facing redundancy. I’m selling to a first-time buyer and I’m not in a chain, but it is hard. I wish the government had encouraged lenders to come back to offer mortgages to those with 5% as asking for 10% or 15% can mean the difference of £5,000 or £10,000.”

Reference: Hilary Osborne and Shane Hickey, 'Mortgages still in lockdown despite stamp-duty holiday' - https://www.theguardian.com/money/2020/jul/19/mortgages-still-in-lockdown-despite-stamp-duty-holiday