A few days ago we only just completed on a property in Hampstead. The property was a garden flat with a lower ground floor and it was purchased for £965,000 with a share of freehold for the whole block. The end value we believe is £1.4m; and so there’s a lot of meat on the bone. Even after the refurbishment costs.
Completing was no easy task. Two of our clients were purchasing this property as a JV between themselves. We exchanged some time back, the mortgage was promptly applied for and we received the offer following the valuation of the property. After this you leave it to the lawyers to complete the transaction – or so I thought.
One of the clients asked me if he can go on a trip to India, so I casually said “it’s no issue as long as you have cleared all the paperwork with the lawyers”.
In this particular case the lenders have their own lawyers and we have ours. Although the offer was in their lawyers were still working on the legal paperwork checking all the titles etc; we expected all of this to be in order as our lawyers checked all of this prior to exchange.
However a couple of days before completion we were told by the lender’s lawyer that things were not in order, as according to them the freehold which we were also purchasing had not been transferred properly.
There were two bits to our purchase: one was the leasehold interest which held the bulk of the value and the other was the freehold which held a nominal value of £30-£50k.
When the freehold is transferred it is supposed to be offered to the other leaseholders first, in other words they have the first right of refusal. Therefore they were of the opinion we were not purchasing it in the correct manner; we could only purchase it after it had been offered to the other leaseholders.
This had not happened.
However there were a couple of issues with this: Firstly the sale of the freehold was a separate transaction and secondly the freehold was not sold. The freehold was owned in a company name and all that happened was a share transfer and therefore our lawyers felt it was unaffected.
Lenders always view everything from the worst case scenario, so before lending money they want to be sure that should the situation arise they can repossess the property quickly and can get their money back.
In this situation the freeholder would be the same as the leaseholder so if they repossessed the property the freeholder could make it difficult for them by not authorising the leasehold to be transferred, though they cannot unreasonably withhold this. Secondly the other leaseholders could challenge the freehold ownership at a later date, and this could affect the freehold title.
They first insisted they take a charge on the freehold, we mentioned we didn’t have an issue, but our problem was that one of our clients was in a remote part of India and therefore couldn’t make it down to the lawyers office to sign the relevant documents – which they insisted must be signed in front of UK lawyers.
We even suggested we sell the freehold to a third party and get rid of the problem once and for all, but they weren’t having that either. In all fairness I never anticipated these kind of issues would be raised by the simultaneous purchase of a freehold and leasehold.
Our lawyers were of a different opinion, that none of this mattered as the way the freehold had been sold circumvented the right of refusal requirements; and this was an independent transaction.
Now I’m not a lawyer, so I do not to date know if the mortgage company’s lawyers were talking sense or not. But I do know most lawyers’ primary objective is not to get the deal done, but to cover themselves from any imaginable issue ever to arise in the future. They also get paid irrespective of whether the deal completes or not, so they have no vested interest in making the deal happen.
When our lawyers pointed out the reasoning for not offering the freehold to the other leaseholders, rather than answer quickly and cooperate the lender’s lawyers started to drag their feet; this is because it is very difficult to take a stance and then go back on your word as it indicates you’re incompetent, so then they stretched the time on hoping we would disappear. The lenders have to stand behind their lawyers decisions as if they venture outside of their recommendations, and if they prove to be incorrect, they can be sued as their indemnity insurance probably wouldn’t cover them.
So the completion day had come and gone. We were served with a notice to complete from the seller which means if we didn’t complete within 7 days we would stand to lose £100,000. With only 5 days to go we were left hanging. What was even more annoying was that these ‘issues’ were always on the table, nothing was hidden from the lender; and so to bring these issues up so close to completion was very unprofessional and completely unnecessary.
So with only a few days to go and no money to complete we were stuck between a rock and a hard place.
Generally I always try and keep ideas of one or two backup sources of funds at the back of my mind; so on the Friday we managed to get another company to approve the loan, in time for completion on Wednesday. We actually had a few more days than this but we wanted to keep a couple of days in reserve (just in case…). I was impressed at the speed of their solicitor, she was working over the weekend, after she had got an undertaking for her fees from our lawyer, to get all the paperwork done in time for completion on Wednesday; emails were flying around at 4.30 am in the morning on a weekend. This was a small Jewish firm who were in the same location as our property in Hampstead, they knew the property well, surprisingly well, as they were acting for the original buyer who was going to purchase the property for £980,000, so they had been down this road before. This party had been looking to buy this flat prior us; however they were gazumped by us, not by a higher offer, but by our speed.
The lawyer worked flat out for three days to ensure the deal was ready to complete on Wednesday. However, she then found out that she did not need to complete on Wednesday and we did in fact have more time, needless to say she wasn’t too happy and so she then started to be difficult with us, though our lawyers tried to explain we didn’t say we had to complete on Wednesday simply that we would like too. But she had got the hump so started asking awkward questions.
However we managed to speak to the mortgage company and between our lawyers and their lawyer the matter completed on Thursday to the relief of all concerned.
It just goes to show you, one can never be too relaxed with funding. Lenders or their lawyers can get cold feet very quickly and there are more people requiring money then there is money to go around. The lending market has changed dramatically in only a few years, on the ground level. More and more borrowers are turning to bridging companies as a means of finance. The bridging market was worth £1bn in 2012 and is looking to grow by 50% in the following year. Bridging finance is now becoming mainstream as a consequence of the decline in lending by the high street institutions.
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A Property Investment Company
!Tips of the Week
Three points should be considered when investing in property: Firstly, is the investment safe? Meaning can you rent the property quickly and for what amount? Secondly, is there capital growth? And thirdly, can you exit quickly – if required.
Flipping properties can give very high returns in the short time while BTL properties give constant income and continuous growth. Decide which ones suits you before buying.