Why Do I Need a Deed of Variation to Sell My Property?

You bought your flat or freehold house, obtained a mortgage and completed without any apparent difficulty. Years later, you decide to sell or remortgage and are told that the lease, transfer or estate rentcharge provisions are unacceptable unless the relevant parties enter into a deed of variation.

The document has not changed, so why has it suddenly become a problem?

The answer may lie in the wording of the original document, the requirements of the new mortgage lender or what was identified and explained when you bought the property.

What is a deed of variation?

A deed of variation is a formal legal document that changes particular provisions in an existing lease, transfer or other property deed.

It does not necessarily replace the original document. Instead, it records the agreed amendments and is read alongside the document being varied.

A deed of variation might be required to:

• change an onerous ground rent clause;
• correct an inaccurate property description or plan;
• add missing rights of access, support, shelter or services;
• clarify responsibility for repairing a building or shared areas;
• correct defective service charge provisions;
• add appropriate insurance and reinstatement obligations;
• improve the enforcement of covenants between property owners;
• remove an unacceptable restriction on selling or mortgaging;
• restrict estate rentcharge enforcement remedies; or
• provide protection required by a mortgage lender.

The precise amendment matters. A deed addressing one issue does not necessarily remedy every concern affecting the property.

A deed of variation is not limited to leasehold property

Deeds of variation are frequently associated with defective leases, but they may also be requested when a freehold house is sold.

A common example involves a freehold property on a modern development where the owner must contribute towards maintaining private roads, landscaping, drainage, play areas or other communal facilities.

The obligation may be secured through an estate rentcharge contained in the original transfer of the house. This is different from the ground rent payable under a lease.

Where an estate rentcharge exists, a buyer’s conveyancer may examine the remedies available to the rentcharge owner if the contribution is not paid. If those remedies concern the buyer’s mortgage lender, a deed of variation may be requested before the purchase can proceed.

Why section 121 can concern mortgage lenders

Section 121 of the Law of Property Act 1925 provides statutory remedies for recovering certain annual sums charged on land.

Those remedies can include rights arising when the relevant sum remains unpaid. The potential effect upon the property and the mortgage lender’s security explains why some lenders require particular protections.

A deed of variation may seek to:

• exclude or restrict particular section 121 remedies;
• prevent the grant of a lease over the property as an enforcement measure;
• require notice to be given to the mortgage lender before enforcement;
• give the lender an opportunity to pay any arrears; or
• replace the existing enforcement provisions with more proportionate remedies.

The exact wording of the transfer and the lender’s requirements must be checked. The fact that a homeowner pays an estate maintenance charge does not, by itself, establish that every section 121 concern arises.

Ask what is actually being varied

A seller may simply be told that the buyer’s conveyancer requires a deed of variation. That description is not sufficiently precise.

The request should identify:

• the lease, transfer or other deed requiring amendment;
• the clause said to create the problem;
• whether the issue concerns an estate rentcharge, covenant or another legal mechanism;
• the statutory or contractual remedy causing concern;
• the wording the buyer or lender requires;
• whether the matter has been referred to the buyer’s lender; and
• whether indemnity insurance or another solution would be accepted.

This is especially important where the seller’s conveyancer and the buyer’s conveyancer disagree about whether a variation is required.

The disagreement cannot be resolved by repeatedly using the phrase “deed of variation”. The underlying document, the allegedly defective provision and the proposed amendment must be examined.

Why can the issue remain hidden for years?

A problematic lease provision or estate rentcharge may cause no obvious difficulty during normal ownership.

The homeowner pays the charges, uses the property and has no dispute with the landlord, developer or management company. The problem only becomes visible when a new conveyancer examines the documents for a buyer or mortgage lender.

This explains why many homeowners first hear about a deed of variation when their sale is already well advanced. By then, the transaction may depend upon several third parties agreeing new wording.

Our article Leasehold Problems Buyers Discover Too Late considers the wider problem of provisions whose financial, lending and resale consequences may not emerge until years after completion.

Why did my mortgage lender accept the property?

The fact that the original mortgage completed does not necessarily establish that the document was acceptable to every lender.

Several explanations are possible:

• the original lender may have accepted the wording;
• the buyer may now be using a lender with different requirements;
• the original lender may have changed its requirements;
• the issue may have been reported and specifically approved;
• indemnity insurance may have been accepted;
• a mortgagee protection clause may already have been considered sufficient;
• the concern may have been overlooked; or
• the homeowner may not have been advised adequately about the risk of a future sale being delayed.

A completed mortgage proves that a particular lender advanced money in a particular transaction. It does not reveal what the lender was told, what other lenders would have accepted or what advice the buyer received.

Why did my neighbours sell without a variation?

A seller may discover that neighbours on the same development completed recent sales without obtaining deeds of variation.

That information may be worth investigating, but it does not prove that the present buyer’s conveyancer is mistaken.

There may be important differences:

• the properties may be governed by different transfers;
• one property may already benefit from a later variation;
• the wording may have changed during different phases of the development;
• the buyers may have used different mortgage lenders;
• one lender may have accepted an existing protection clause;
• indemnity insurance may have been accepted; or
• the issue may not have been identified during the other transaction.

The useful question is not simply whether another property sold. It is whether that property was governed by materially identical wording and whether the lender requirements were comparable.

Who needs to agree to the variation?

The necessary parties depend upon the document and provision being changed. They may include:

• the property owner;
• the freeholder or landlord;
• the developer;
• the management company;
• the estate rentcharge owner;
• another leaseholder or property owner whose rights are affected;
• the existing mortgage lender; and
• the proposed buyer’s mortgage lender.

The relevant party is not necessarily obliged to agree merely because the homeowner needs to sell. It may instruct its own solicitor, request amendments to the proposed wording and require its legal and administrative costs to be paid.

Management company delays can threaten a sale

A deed of variation cannot usually be completed by the seller and buyer alone. The cooperation of a developer, freeholder, management company or rentcharge owner may be essential.

Obtaining that cooperation can take weeks or months. The organisation may require payment in advance, refer the matter to an external solicitor and refuse wording proposed by the buyer’s lender.

Where several properties on the same development are affected, the seller should ask whether:

• a standard form of variation has already been agreed;
• another owner has recently completed a similar variation;
• the developer or management company has an established application process;
• legal and administrative fees have been published; and
• a realistic completion timescale can be provided.

The earlier these enquiries are raised, the less likely the variation is to become a last minute threat to exchange.

Who pays for the deed of variation?

There is not necessarily a universal rule that either the seller or buyer must pay. Responsibility can become a matter for negotiation.

The buyer may argue that the seller is offering a property with a document that does not satisfy the buyer’s lender. The seller may respond that the buyer selected that lender and that the property was previously bought and mortgaged without the proposed amendment.

Commercially, the seller may agree to pay because the transaction cannot proceed without the variation and the same objection could arise with another mortgaged buyer.

The parties might instead agree to divide the expense or reflect it in the purchase price.

Before agreeing to pay, the seller should obtain a breakdown covering:

• the other party’s legal costs;
• management company or developer administration charges;
• the seller’s conveyancing costs;
• the cost of obtaining lender consent;
• Land Registry fees; and
• any premium requested for agreeing to the variation.

The seller should also establish whether the fees are payable if the proposed sale does not proceed.

Can indemnity insurance replace a variation?

Indemnity insurance may sometimes be proposed where a deed of variation cannot be obtained quickly or at an acceptable cost.

Insurance and variation are not the same solution.

A deed of variation changes the legal document. An indemnity policy does not. It responds only to the risks and losses described in the policy.

Insurance cannot ordinarily:

• create a missing right;
• change an escalating ground rent clause;
• repair defective service charge provisions;
• remove section 121 remedies from a transfer;
• force a management company to maintain the estate;
• make another party comply with a covenant; or
• make the property acceptable to every mortgage lender.

The buyer’s conveyancer must check whether the proposed lender accepts insurance for the particular defect. Some lenders may accept a policy subject to conditions, while others may require the document itself to be varied.

Historical lender requirements may explain what happened

Looking at a lender’s current instructions does not necessarily establish what it required when the homeowner originally bought the property.

The Lexsure Lender Archive defective lease page can help establish how the original lender treated unsatisfactory lease terms on the relevant date.

Where the variation concerns a freehold estate charge, the Lexsure Lender Archive estate rentcharge page provides the corresponding historical lender information.

The historical record may help establish:

• what the original lender’s recorded requirements said;
• whether the defect had to be reported;
• whether lender approval was required;
• whether indemnity insurance was acceptable;
• whether a deed of variation was required; and
• whether the lender’s position later changed.

This evidence must be considered alongside the original conveyancing file. It does not, by itself, establish that anyone was negligent or that the current buyer’s lender must accept the property.

What should the original purchase file contain?

If the need for a deed of variation only emerges during a later sale, the homeowner should retrieve the papers from the original purchase.

Relevant documents may include:

• the lease, transfer and any supplemental deeds;
• the title register and plan;
• the original Report on Title;
• correspondence about the disputed provision;
• the mortgage offer and valuation;
• the lender instructions applying at the time;
• any referral to the lender and its response;
• any existing indemnity policy;
• the management information supplied during the purchase; and
• any undertaking or agreement to obtain a variation later.

The file may show that the concern was identified and an acceptable solution was arranged. It may demonstrate that the lender approved the position or that the homeowner was warned about possible resale consequences.

Alternatively, it may raise further questions about whether the issue was recognised and properly explained.

What should the seller do now?

The seller should ask the current conveyancer to identify the alleged defect and required solution in writing.

The immediate questions are:

• What document needs to be changed?
• Which provision is unacceptable?
• Who is objecting to it?
• Has the matter been referred to the buyer’s lender?
• What precise wording would resolve the concern?
• Who must consent and execute the variation?
• What will it cost?
• How long is it likely to take?
• Would insurance or another protection be accepted?
• Will the completed deed bind future owners and lenders?

The seller should also examine what happened during the original purchase. That historical investigation will not complete the current variation, but it may explain why the problem was not addressed earlier.

The key question is what you were told when you bought

A deed of variation becoming necessary during a sale does not prove that the original conveyancing was mishandled. Different lenders may take different positions, and lender requirements can change.

However, the homeowner may reasonably ask:

• Was the problematic provision present when I bought?
• Was it identified during my conveyancing?
• What did my mortgage lender require at the time?
• Was the issue reported to my lender?
• Was insurance used instead of changing the document?
• Was I warned that a future buyer might require a variation?
• Would I have proceeded or paid the same price if I had understood the position?

This article provides general information only and is not legal or financial advice. The meaning of a lease, transfer, covenant or estate rentcharge and the requirements of a mortgage lender depend upon the documents and circumstances of the individual transaction.