Deletion of 'forfeiture on bankruptcy' in long lease

[jonjox]

i have an ongoing freehold commercial premises sale(while ihave the freehold -as its a basement with residential flats above its a 99 year lease thing etc flying lease do they call it?)
i have a buyer all ok and ready to buy etc but he wants this clause taken out of the old lease due to a demand from the bank who will not loan him the capitol unless it is deleted from the new assigned lease.
the landlords(a housing company from which the premises were bought from-essentially freehold but a 99 or more year lease etc) state that by taking this clause out of any new lease ie by assigning it to the purchaser minus i the forfeiture on bankruptcy clause-the new lease will become more valuable so they -the landlords are demanding a percentage of any sale price for doing it.
the premises were bought by myself many years ago when this clause in the lease was not deemed important or relevent by the banks when any funds were lent to commercial buyers.
is there any relevent information or any previous cases from which i can compare information and also on what basis does either a solictor or surveyor arrive at a percentage of the sale price or indeed value this clause and its deletion in any lease.
i know a better and cheaper solution would be of course to sell it to a buyer who is buying without a bank loan etc.
i think this is un reasonable from the landlords
the buyer is a sound business man with ex refs and also with existing property in my town-he plans to buy for investment , improve and let out the premises-an ideal new owner-and of course abide by local regs re use of the property ie no sex shop, take away etc.
also i have been informed that a local surveyor will give a value on the lease without the clause but for this charge a fee of £2000.
i would welcome any suggestions or links to previous examples of this type
thanks
brian

[Landlord9467]

I have come across a similar issue on a 999 year lease which began only 5 years ago. Can you please tell me what happened?

Many thanks

[Landlord9467]

Hi there,

I wonder if anyone can offer some advise.

A commercial property was purchased about 5 years ago on a long lease of 999 years for £1/2m.

A commercial mortgage was arranged at the same time of purchase using the same broker.

A recent sale of the property has failed because the purchasers solicitor says the lease includes a forfeiture right in the event of bankruptcy, and as such no lender will provide finance.

All the surrounding units do not have such a clause but the freeholder says they have no reason to change the lease since the paperwork was signed and there is no more to discuss.

The solicitor firm used for the initial conveyancing said they will refer the matter but do not admit any liability.

If I understand this correctly, does this clause effectively mean the commercial mortgage provider has no security in terms of the property as an asset? And if so the how did the existing finance get through.

I think this looks like the original conveyancing solicitors mistake but the key question now is what if any recourse is there? Unless a cash buyer comes along the property is unsellable and hence worth less than the leaseholder was originally lead to believe at purchase.

I appreciate any comments.

Many thanks,

[quarterday]

Hi there,

I wonder if anyone can offer some advise.

A commercial property was purchased about 5 years ago on a long lease of 999 years for £1/2m.

A commercial mortgage was arranged at the same time of purchase using the same broker.

A recent sale of the property has failed because the purchasers solicitor says the lease includes a forfeiture right in the event of bankruptcy, and as such no lender will provide finance.

All the surrounding units do not have such a clause but the freeholder says they have no reason to change the lease since the paperwork was signed and there is no more to discuss.

The solicitor firm used for the initial conveyancing said they will refer the matter but do not admit any liability.

If I understand this correctly, does this clause effectively mean the commercial mortgage provider has no security in terms of the property as an asset? And if so the how did the existing finance get through.

I think this looks like the original conveyancing solicitors mistake but the key question now is what if any recourse is there? Unless a cash buyer comes along the property is unsellable and hence worth less than the leaseholder was originally lead to believe at purchase.

I appreciate any comments.

Many thanks,

A very interesting story. And I wonder if the seller is in collusion with the present lenders in some way?

Is the present owner (lessee) a private individual or limited company?

Although insolvency is unfortunately a fact of life , there are many types of insolvency and a valuable ground lease owned by for example a company could not be forfeit if for example the company went into administrative receivership; this is not bankruptcy. Does the lease refer to "compounding with creditors" or just bankruptcy? The personal equivalent of "admininstration" is an "IVA" an individual voluntary arrangement, it s a form of insolvency but its not bankruptcy as such.

Strangely enough there was a time when the same sort of clause would be drafted into supplemental residential leases; and even forty years ago a buyers lawyer worthy of the name would seek to have it deleted. The measure of damages is, you might think what the seller will charge for a lease variation to expunge this clause but it is not necessarily so simple. Whomsoever acted for the buyer has got some serious explaining to do. Hire a new solicitor to make a claim against the original solicitor, they should be insured as all solicitors are obliged to hold cover. I think you need expert advice on the scope of the bankruptcy clause. I dont think by the sound of it that you were adequately advised and represented at the time of purchase as it would not I think be usual nowadays to accept such a clause even of in the original draft. I am amazed what on occasion can be sneaked past one lawyer by another in transfer or lease unnoticed. Auction contracts are famously sneaky in such respects as most buyers in the room will assume that the contract will be fairly standard. Perhaps "sneaky" is a little unkind, but in such a sale sellers solicitors will try to put all matters that are at doubt at the buyers risk rather than the vendors

What's the ground rent incidentally? And why was the freehold retained; another approach is to resolve the problem by buying in the freehold reversion but if the freeholder doesnt want to sell there's no mileage there.

[Landlord9467]

Thank you so much for your reply.

The present owner is a private individual, not in collusion with any lender, and their original conveyancer was a large "reputable" company.

As far as I am aware the lease only deals with the case of bankruptcy.

It is very unlikely the freeholder will offer a freehold reversion and the ground rent is not payable since apparently it is included in the principal sum paid for the property.

From your comments and some other research it does indeed seem as though the lessees solicitor has caused this issue. But is this a clear cut situation or can the solicitor defend his actions to the point of no liability?

Thanks again in advance,

[Landlord9467]

Sorry the lease does also deal with IVA re-entry.

When looking at the conveyancing solicitor comments, they say to carefully read re-entry conditions which refer to the potential winding up of the tenant company. This is the only mention made by the solicitor about the now problematic term(s). They were never explained any further than this.

Also can you confirm is it true that a mortgage provider would not lend against a long lease with such a clause(s) for forfeiture. I don't quite understand the process.

Please help!

Many thanks

[Lawcruncher]

Lenders requiring that leases they lend on do not have provisions allowing forfeiture on insolvency is pretty standard, if not universal.

Where (as appears to be the case here) a capital sum is paid there really ought to be no provision for forfeiture on insolvency. In practice so far as I can recall, section 146 applies to forfeiture on bankruptcy. That means the tenant will have the right to apply for relief against forfeiture. I cannot imagine a court declining to award relief because a failure to do so would place back in the landlord's hands a valuable asset out of all proportion to any loss he had suffered. Even so, the provision ought not be there to give the landlord the chance to forfeit and because if there is a forfeiture an application has to be made.The provision is really only needed where a landlord lets at a rack rent so that he can get his property back quickly.

I do not think that the solicitor's merely pointing out the provision was good enough. They ought to have explained its effect, pointing out that it might affect a sale. Of course they ought to have gone further and insisted that the provision was removed from the draft lease. It is unlikely the landlord would have risked losing the sale to keep the provision in.

Whilst it sometimes happens that a sale does not go through because a solicitor has given incorrect advice, that is not the case here. The fact that a sale was lost is almost conclusive evidence that the solicitors were negligent. I am no expert on damages and could not say what they ought to be if the solicitor is found negligent. I suppose the damages are the difference between a property held under a lease with the provision and one held under a lease without the provision. How a valuer would work that out I have no idea.

[Landlord9467]

Hi Lawcruncher,

Thank you for replying and addressing the issues so well.

Most informative and in line with the professional advice the lease holder received today.

Much appreciated.... great work :)

[Lawcruncher]

Whilst it sometimes happens that a sale does not go through because a solicitor has given incorrect advice...

Just by way of clarification, I refer here to a buyer's solicitor.

[Landlord9467]

Hello again,

It appears the saga continues but with a new devastating twist.

The LL (L1) has been notified by the Freeholder that they are seeking to reposses the property under the bankruptcy forfeiture clause given the LLs previous co-owner (L2) had entered into bankruptcy. (As per another thread but summed up below).

At this stage the original conveyancing solicitor has said they cannot assist anymore with rectifying the lease and that they do not hold themselves liable for the loss since it was bought about by the actions of one of the LLs who were advised to look at re-entry rights on the lease.

This has left L1 with loss of their property and full liability for the remaining mortgage.

I should point out that prior to L2s bankruptcy, L2 signed over his beneficial interest in the property to a 3rd party as part settlement of a law suite. L1 negotiated purchase back of this share from the 3rd party and thereafter purchased title from L2 for a token value. The Freeholder is claiming they would have not approved such transfer and would have sought to reposses at that stage.

This situation appears laughable but may result in L1 going bankrupt also. Can anyone offer any assistance or advice?

Many thanks,

[Landlord9467]

Please help!!

[Lawcruncher]

The situation is a bit complicated and I think you need to consult a landlord and tenant specialist lawyer as you have a lot to lose.

For what it is worth, I cannot see a court allowing forfeiture of a 999 years for insolvency anyway and and certainly not in a case where it is the previous and not the current tenant who is bankrupt.

[Landlord9467]

Dear Sirs,

The Freeholder is no longer threatening repossession and has agreed to amend the lease terms (removal of forfeiture clauses) in return for a sum of £50k. This was negotiated by the original conveyancing solicitor and approved by their insurance.

However its has been well over a year and the LLs buyer may have backed out. If the property is now sold for a lower price can the LL reasonably claim the difference from his original conveyancing solicitors (who are already paying via insurance to make good the lease).

The solicitors are telling the LL that they will only follow through with the lease rectification on the basis the LL waives any further rights to claim arising from this situation.

Thank you for you help in advance as always.

Kind Regards,

LLZ9467