A leasehold owner spent months trying to sell a flat before the buyer’s buy to let mortgage offer was withdrawn. The decisive problem was not the condition of the flat or the agreed price. The lease prohibited letting.
The proposed buyer needed a mortgage for a property that would be rented out. Once the restriction was identified, the lender would not proceed. The owner was left facing a collapsed transaction and the prospect of marketing the flat only to owner occupiers.
This is an anonymised example based on circumstances described publicly by a homeowner. Several problems affected the transaction, including difficulties involving the freeholder, building insurance, repairs and management information. However, the letting restriction was described as the final obstacle that caused the mortgage offer to be withdrawn.
Did you discover a lease restriction when trying to sell, remortgage or let your property?
When I Bought explains the documents and advice from your original purchase that may help establish what you were told and whether the future consequences were properly explained.
How can a restriction on letting cause a sale to collapse?
A lease may contain an absolute prohibition on subletting, or it may permit subletting only after the landlord or management company has given consent. Other leases impose conditions concerning the type of tenancy, the length of the letting or the information that must be supplied.
These distinctions matter. A buyer requiring a buy to let mortgage must be legally entitled to let the property. If the lease contains an absolute prohibition, the buyer may be unable to use the flat for the purpose on which the mortgage application is based.
The fact that other flats in the building have been rented out does not necessarily solve the problem. Other owners may have differently worded leases, may have obtained consent or may simply be acting in breach of their leases. A history of apparent non enforcement should not be treated as confirmation that a new buyer and mortgage lender can disregard the restriction.
Why does this affect more than buy to let purchasers?
An owner may never intend to become a landlord. Nevertheless, a prohibition on letting can still affect the value and future marketability of the property.
When the property is eventually sold, the restriction may exclude investors and other purchasers who require buy to let finance. It may also concern a residential buyer who wants the flexibility to let the flat temporarily because of work, family circumstances or a future move.
A restriction can therefore reduce the potential market even though the present owner has occupied the property throughout their ownership.
This illustrates an important distinction between being able to live in a property and being able to sell it freely. A lease provision may cause no immediate problem after completion but become commercially significant years later.
Should the restriction have been explained when the property was bought?
A Report on Title should do more than reproduce wording from the lease. The buyer needs to understand the practical consequences of provisions that may affect how the property can be occupied, mortgaged and sold.
Relevant questions may include:
- Was the prohibition or consent requirement identified?
- Was the buyer told whether the restriction was absolute or conditional?
- Was the effect on future letting explained?
- Was the possible effect on mortgageability and resale considered?
- Did the buyer disclose any intention to let the property?
- Was the buyer warned that the restriction could exclude future buy to let purchasers?
- Did the original mortgage lender have any relevant requirements?
The existence of the clause does not establish on its own that the original conveyancer was at fault. The lease, client instructions, Report on Title, correspondence and lender requirements applying at the time all need to be considered.
Our earlier article on managing client expectations in conveyancing explains why identifying a restriction is not enough. The client must be told what it could mean in practice.
Does a previous mortgage prove the lease was acceptable?
No. The original mortgage may have been a residential owner occupier mortgage, while the proposed buyer requires buy to let finance. The two lenders may therefore be considering different risks.
Lender requirements also change. A lender’s current instructions do not necessarily establish what it required when the owner originally bought the flat.
The Lexsure Lender Archive occupancy restrictions page provides access to historical mortgage lender requirements by completion date and lender. This can help establish what was recorded at the relevant time, although the lender instructions must be considered alongside the lease and the advice actually provided.
Can a prohibition on letting be removed?
A deed of variation may sometimes be negotiated with the freeholder to amend the lease. This is not an automatic solution. The freeholder may refuse, seek payment or require the owner to meet legal and administrative costs.
A variation can also take time. If the property is already being sold, the delay may be unacceptable to the buyer or mortgage lender. Any existing mortgage lender may also need to consent to a change affecting the lease.
The position becomes more difficult where the freeholder cannot be located or will not engage. Owners facing that separate problem may also find the When I Bought absent freeholder guide useful.
Restrictions are only one type of leasehold problem that can emerge during a later transaction. Our guide to a defective lease discovered when selling or remortgaging explains how inadequate lease provisions can create similar difficulties.
What should the owner do after a sale collapses?
The starting point is to establish precisely why the buyer’s lender withdrew. The owner should ask their conveyancer for the written objection and identify the exact lease provision on which it was based.
The owner should then locate the documents from the original purchase, including:
- the lease and any supplemental deeds;
- the original Report on Title;
- correspondence explaining restrictions on occupation or letting;
- the mortgage offer and relevant lender instructions;
- the client care documents and completed questionnaires; and
- any consent, licence or deed of variation obtained at the time.
These documents may show whether the restriction was identified, how it was explained and whether the buyer’s intended use of the property was discussed.
The real cost of a clause that appeared unimportant
A failed sale can produce more than disappointment. The owner may incur additional legal fees, mortgage costs, service charges and marketing expenses. A connected purchase may also be lost. If future marketing is limited to owner occupiers, the restriction may affect the number of potential buyers and the price they are prepared to pay.
That does not mean every collapsed transaction creates a claim. It does mean that the original advice deserves examination where a significant lease restriction appears to have come as a complete surprise.
The critical question is not simply whether the clause appeared somewhere in the lease or within a lengthy report. It is whether the buyer was given a sufficiently clear explanation to understand how the restriction could affect the future use, mortgageability and saleability of the property.
Did the restriction only become clear when your sale or remortgage failed?
When I Bought helps property owners investigate what was recorded, required and explained during their original purchase.
This article provides general information only and is not legal advice. The effect of a lease restriction depends on its precise wording, the surrounding documents and the circumstances of the transaction. Mortgage lender requirements vary and can change. Obtain advice from an appropriately qualified professional. Time limits may apply to legal claims.