TOPIC 4 - Topic 4: Principles of mortgage and property law

Question 1

What does conveyance mean?

Answer 1

The transfer of rights in property ie ownership of property is passed from one person to another

Used in a sentence:
Before the conveyance is finalised, due diligence must be carried out

Question 2

What does mortgagor mean?

What does mortgagee mean?

What are the terms for the above in Scotland?

Answer 2

Mortgagor = borrower
Remember: MortgageOR sounds like BorrowOR

Mortgage = lender

In Scotland the borrower = debtor and lender = creditor

Question 3

What are the names of the three significant acts introduced in 1925 which changed many aspects of property ownership?

Answer 3

Law Of Property Act

Land Registration Act

Land Charges Act

Question 4

One of the most significant changes that was introduced in the 1925 acts was around the ownership of land

It changed ownership of land into two types?

What are these two types?

Answer 4

Type 1 = estate in fee simple absolute in possession (known as ‘freehold’)

Type 2 = estate for a term of years absolute (known as ‘leasehold’)

‘fee simple’ = The right for the property to be inherited on death

‘Absolute’ = No limits on ownership

‘In Possession’ = Immediate entitlement to occupation: nobody else has a prior claim

‘TERM OF YEARS ABSOLUTE’ = Leasehold estate, which has a limited duration that must be fixed and
certain

Question 5

A principle of land ownership in the UK is that ‘whoever owns
the soil owns everything up to the heavens and down to the depths of the earth’

What is the rules now relating ownership to airspace above a home and land underneath it?

Answer 5

Airspace above the land is limited to what is reasonable for the ordinary use and enjoyment of
the land – so an individual could not take action for trespass
against an aeroplane 30,000 feet above their property.

The owner of land also owns the space below it and any minerals
lying beneath it, apart from the rights of the Crown in relation
to oil, coal, natural gas, gold and silver.

Question 6

What is the mortgage term ‘legal charge’ known as in Scotland?

Answer 6

‘standard security’

Question 7

What does ‘legal charge’ mean in relation to mortgages?

Answer 7

A legal charge just means the property is owned by the borrower and the legal charge is a deed that states that the property has been charged with the debt (the loan) as security
for the lender

(ie, the lender will take the property if the borrower fails to pay)

Question 8

Why would a second mortgage lender not offer a second mortgage if there is not sufficient equity in the property

What does this mean and how does a second mortgage lender know if there is sufficient equity?

Answer 8

If the first mortgagee fails to receive enough from the sale of the property to repay its loan, then subsequent mortgagees will get nothing.

So, a lender will only accept a second or subsequent mortgage if it feels that there is sufficient ‘equity’ (value) in the mortgaged property to COMFORTABLY cover all mortgages

Question 9

Are second mortgages riskier than first mortgages. What does this mean in relation to charges and who normally offers second mortgages?

Answer 9

Second mortgages present the lender with a higher risk and are likely to be offered at higher rates of interest or with higher tariffs of charges and fees compared to the first mortgage;

they are often provided by finance houses, which specialise in higher‑risk
secured lending

Question 10

How many people can you have registered as legal owners of a property?

Answer 10

It is possible for up to four people to be registered as legal
owners of a property

Question 11

A max of four people can be registered as legal owners of a property

What if there are more than 4 people looking to own the property?

Answer 11

If there are more than four potential owners, four will be registered as the legal owners.

Everyone else who has a share in the property that are not the legal owners are referred to as equitable
(or beneficial) owners

Question 12

What is the difference between a registered property and an unregistered property?

Answer 12

A registered property has its details recorded in the official government land registry, which provides a secure and legal record of ownership

An unregistered property lacks this documentation which can lead to challenges establishing ownership and so on down the line

Question 13

What does tenancy/tenant mean?

Answer 13

Tenancy/tenant is used as a name for joint owners of property

It is also used as name for someone who rents a property

Because it has these two meanings it confuses lots of people

Question 14

Describe joint tenancy

Answer 14

Each joint owner owns 100% of the property

On death of a joint owner, the surviving owner will take over legal ownership of the property

This transfer is automatic and CANNOT be overridden such as by a term in the late owners’ will or through the laws of intestacy

Question 15

Decribe Tenancy In Common

Answer 15

Like with Joint Tenancy, the joint legal owners are regarded as a single owner but are trustees of the land

However, each legal owner is also the Benifical/Equitable owner of a defined interest (share) of the equity in the property, as agreed between them

Question 16

When a property is owned jointly how is it set up in relation to trustees?

Answer 16

When a property is owned jointly, a trust of land is created automatically, with the property’s legal owners as trustees.

Question 17

Explain the process when a joint tenant dies for a Tenancy In Common arrangement.

Answer 17

Upon death, legal ownership moves to the surviving tenant meaning there is one legal owner of the property.

A property held jointly cannot be sold by one legal owner, there must be at least two legal owners in agreement for the sale to go ahead.

Because one of the joint tenants is dead the surviving tenant must appoint a trustee (normally the executor of the dead tenant) for the deceased tenants share

Once this is done there is two legal owners of the property; the surviving tenant and the appointed trustee.

The property can then be sold and the proceeds distributed in accordance with the agreed shares

If the surviving tenant didn’t want to the sell they don’t have to

Question 18

Dave and Sheila own their property, valued at £300,000 with
no mortgage, as tenants in common on a 50:50 basis. Both
have made wills, leaving their share of the property to their children; Dave’s brother Jim is his executor.

Explain what happens if Dave dies

Answer 18

On Dave’s death, Sheila would become the sole legal owner of
the property.

Dave’s £150,000 beneficial share of
the equity in the property would pass to the beneficiaries of his will

At this point Sheila cannot sell the property as she is the only legal owner of the property. (You must have at least two legal owners in agreement to sell the property)

Because she cannot sell the property, Sheila holds Daves share of property in trust for his beneficiarys

Sheila then most likely appoints Jim (or anyone else) to replace Dave as trustee for the land. Once that is done, the property can be transferred into Sheila and Jim’s names as joint owners

As joint owners, they can sell the property if both are in agreement, but they must protect the interests of the beneficial/equitable owners of the property - Daves beneficiaries and Sheila

If the property is not sold, on Sheila’s death her executors and Daves trustee distribute the proceeds and this is when Daves beneficiaries can receive the proceeds

Question 19

What is the equivalent of a Tenancy In Common arrangement in Scotland?

What is the equivalent of a Joint Tenancy Agreement in Scotland?

Answer 19

‘Joint property’ is similar to a joint tenancy in England and
Wales.

‘Common property’ is similar to a tenancy in common in England
and Wales

Question 20

If a couple have a joint tenancy agreement and own the property in full (no mortgage) and they are not married, what issue can arise on death of one of the tenants

Why does this issue occur?

Answer 20

An Inheritance Tax Liability may occur

IHT regulations regard jointly owned
assets as being owned in equal shares by each owner. ie if the property is 800,000k for IHT purposes, they each own 400,000k. This means when one dies a transfer is made to the surving tenant.

READ A HIDDEN TRAP
PAGE 77, TOPIC 4

Question 21

The 1925 legislations reduced the number of ways in which property (legal estates in land) could
be held to two: freehold and leasehold

What did the
Commonhold and Leasehold Reform Act
2002 introduce?

Answer 21

It introduced a third type of tenure –
commonhold

Tenure = denotes the way a property is hold ie freehold, leasehold, commonhold…

Question 22

What does the word Tenure mean?

Answer 22

It denotes the way in which title to the property is
held ie

Commonhold, Freehold or Leasehold

USED IN A SENTENCE: In the 1925 Property Act there were two types of Tenure; Freehold and Leasehold and then a third type of Tenure, Commonhold, was introduced in the Commonhold and Leasehold Reform Act
in 2002

Question 23

Freehold ownership of property is the best and highest form of ownership in the UK

The property owner owns the property outright

Does this mean the property owner is free to do whatever they want to the property?

Answer 23

They are not

There are some restrictions in place such as requirements to meet local authority conditions and so on

Question 24

Is freehold ownership always better as a security for lenders than leasehold ownership

Explain the answer with an example:

Answer 24

Freehold ownership does not always mean that the property is a better securitythan leasehold property for lenders

For example, many lenders are reluctant to consider mortgages on freehold flats. The reason for this is that the buildings invariably have common areas where there is no clear accountability. For example, the ceiling of one person’s flat is another person’s floor, so it is unclear who is responsible for damage.
In this case, it is better for the lender that the property is held as a leasehold as this means there is a freeholder (the person who owns the flats and is leasing them out) who determines who has responsibility for damages

This is why most leasehold property is flats

Question 25

What does the term ‘flying freehold’ refer to and mean?

Why can flying freehold be an issue for lenders and owners of the land?

Answer 25

Flying freehold is the term used when part of a freehold
property extends above or below another person’s property
but is not next to or touching the ground

For example, a balcony that extends over land owned by the property
next door

Flying freehold can be a major problem, because the owner
of the land may fail to maintain their property, which could result in damage to the property with the flying freehold

Lenders are reluctant to lend to property with a flying freehold unless there is an enforceable requirement on the
landowner to maintain the property or to
allow access to carry out any repairs to the property with the
flying freehold.

Question 26

Describe the structure of a typical lease agreement:

Answer 26

A leasehold agreement contains 3 main parts: The Headlease, The Lessee (The Leaseholder) and the Lessor (The Freeholder)

The Headlease sets out the terms of the lease, including the amount charged in ground rent and so on.

The Lessee adheres to rules set out in the Headlease

The Lessee pays the Lessor groudrent.

Question 27

True or false: A lessor (The freeholder in a leasehold agreement) can create a lease for any amount of time

Answer 27

True

NOTE: If the lease extends 21 years the lessee(The Leaseholder) may gain statutory right to buy the property

Question 28

Is it possible for the leaseholder to lease out the property?

What is this known as?

Answer 28

It is possible for a leaseholder to create a lease to allow another person to use the property, known as a ‘sub‑lease’, as long as the term is shorter than the original lease and the Headlease does not prohibit it

REMEMBER: THE HEADLEASE Sets out the term of lease, the amount of ground rent, and the rights and
obligations of THE LEASEHOLDER - ITS KIND OF LIKE A TRUST DEED

Question 29

The Lessor (The freeholder of a leasehold property) is subject to the same restrictions as a freeholder in freehold property, such as a requirement of adhering to local authority rules and so on.

What extra restrictions do leasehold property’s typically have?

Answer 29

Duties in respect of common areas for the freeholder (For example, the lessor will need to maintain the communal toilets in a block of flats)

A requirement to insure through a specified company

Question 30

When someone buys a leasehold property, what exactly are they buying?

Answer 30

When someone buys a leasehold property, they are buying the right to lease the property – it is the lease that has value and that is what the purchaser is buying.

At no point
does the leaseholder own the land or the bricks and mortar (this is what the freeholder/lessor owns)

Question 31

What does the purchase price of a leasehold property typically depend on?

If a lease is close to expiring, how does this affect the property price?

Answer 31

Depends on a number of factors such as:

the type of property, the value of the property, the ground rent and the remaining term of the lease

As the lease
approaches expiry date, the value of the property will fall significantly. This is because, when a lease expires, the land and building reverts totally to the freeholder and the leaseholders lose all their rights- why would you buy a leasehold property is your going to have to move out in 5 years?

Question 32

Why are lenders wary of short leases?

Answer 32

Most lenders are very wary of short leases, usually specifying that the lease must have a certain minimum number of years to run beyond the redemption date of the mortgage.

A typical requirement would be 30–40 years more than the mortgage term.

If the borrower defaults on the mortgage and they have a short lease it may leave the lender in a position where they have to sell the property well below market value as noone will want to buy a leasehold property that has a short lease.

Look at example on page 83

Question 33

If a lease has a short time left should you as a property buyer completely avoid buying the property?

Answer 33

Most of the time yes, but it is possible for the buyer to secure a lease extension.

If they buy the property and manage to secure an extension, the lease extension will make the property price skyrocket turning a very risky investment into a profitable one- the only issue with this though is that they need to buy the property first, the extension is not guaranteed and for them to apply for an extension they must have owned the property for at least 2 years

and if they dont manage to secure an extension after buying the property, the property will fall further in value as the lease comes closer to expiring, until they own nothing if it does expire and they haven’t sold ( why it is a risky investment)

Question 34

What is a vendor in relation to property?

Answer 34

The vendor is the seller of the property

USED IN A SENTENCE: In many cases, it is in the vendor’s interest to extend the lease before putting the property on the market, rather than
attempting to sell with a short lease at a low price

Question 35

What does Forfeiture mean?

(DO NOT CONFUSE WITH FORCLOSURE)

Answer 35

Where a lease is terminated because the lessee fails to comply with the terms of the lease.

This is a big problem for lenders because they are left with no security since the rights of the freeholder take priority over that of the lenders

Question 36

A big problem for lenders when it comes to leasehold property is Forfeiture. What does this mean, why is this an issue and what do lenders do to counteract this problem?

Answer 36

Where a lease is terminated because the lessee fails to comply with the terms of the lease.

This is a big problem for lenders because if the borrower or lessee fails
to comply with the conditions of the lease and rights are forfeited, the lender is left with no security because the rights of the freeholder take priority over that of the lenders

Lenders includes a clause that the lender has the right to do the things a leaseholder should do if the leaseholder fails to
comply. ie they can sell the property etc

Many lenders also have insurance against loss caused by Forfeiture

Question 37

Explain the ownership structure of a commonhold tenure

Answer 37

Commonhold ownership allows those in large developments to own their property as freehold, such as in a block of flats

The larger development is known as a multi unit development and each property within is known as a unit, so flat owners for example are known as unit holders

Question 38

Who is a Commonhold tenur arrangement for?

Answer 38

Allows a person to own a freehold property within a large development (ie owning a freehold flat within a block of flats)

Prior to the Commonhold Tenure being introduced, you would normally have to own this as a leasehold.

Question 39

What is a Commonhold Association?

Answer 39

This is a company who owns and maintains the common areas of a larger development

The company is owned by the property owners within the large development who each hold shares, with the number of shares allocated dependant on the value of their property

ie, an owner of a two bedroom unit will have two shares whereas a owner of a one bedroom will have 1 share

Question 40

What requirements must be met for an existing leasehold multi unit property to be transferred into a commonhold arrangement?

Answer 40

An existing multi‑unit estate can be converted to commonhold
only where all leaseholders, their lenders and the freeholder are in agreement. (in practise this is difficult to achieve so it rarely happens)

Question 41

What is Enfranchisement?

Answer 41

The right of the owners of leasehold properties in a building (eg a block of flats) to join together to buy the freehold of the building

Used in a sentence: Before the Commonhold and Leasehold Reform Act 2002 was introduced, it was very difficult for leaseholders to exercise their right to Enfranchisement

Question 42

What is Right To Manage (RTM)?

Answer 42

Allows qualifying Leaseholders to set up a ‘Right To Manage’ company so they can take over management of the building from the freeholder.

If the leaseholders request for a RTM company is successful the company takes affect 4 months from the leaseholders inital request and takes on all management functions of the building. NOTE: The freeholder still must be informed on everything such as alterations to the building. However, they do not need to be informed on any maintence.

Qualfying criteria for this is the same as what’s needed for leaseholders to buy the freehold of their flat: ie

50% of leaseholders must agree

2/3rds of flats must be owned by long leaseholders (orginal lease was 21years +)

The building contains at least 2 flats

Non residential use of the building does not exceed 25%

NOTE: If there are 4 or less flats and there is a resident landlord in one of the flats, the building DOES NOT QUALIFY

ALSO: The freeholder can dispute this when they recieve the request from the leaseholders. They must be sent a notice or request within 2 weeks of the leaseholders deciding they want to do it. The freeholder can then send a refusal letter within 1 month. If the freeholder DOESNT challange the notice The RTM will take affect 4 months from the inital notice/request. If the freeholder does challenge it, they can settle it in court.

Question 43

To extend your lease (By buying a new lease) what minimum amount of time do you need to live in the property

Answer 43

2 years

Question 44

What did the Leasehold Reform 2022 introduce?

Answer 44

Ground rent on a long residential lease (21 years or more) created from 30 June 2022 and subject to the payment of a premium
cannot exceed “one peppercorn per year”

ie, ground rent is effectively £0

This was introduced to make leasehold ownership fairer and more affordable

NOTE: Peppercorn rent refers to medival times where people would pay a single pepporcorn as ground rent to maintain their lease

Today peppercorn has no value so this act effectively removes ground rent. The reason it cant just say no to ground rent is because for a contract to be legally binding an exchange of something needs to take place.

Question 45

Stuff advisors should know

Answer 45

outline the rights and obligations of the lender under the mortgage deed;

„ (in England and Wales) distinguish between freehold, leasehold and
commonhold, particularly to answer basic questions by the borrower;

„ (in Scotland) understand the basis of land ownership and its implications
for borrowers;

„ understand the problems associated with lending on leasehold properties
and freehold flats;

„ understand the principles of leasehold reform and other recent legislation

understand factors applicable to tenure that affect the saleability of the
property, especially those of which the owner might not be aware;

Question 46

Explain the key difference between a leasehold arrangement and a freehold arrangement

Answer 46

Freehold = own building and land

Leasehold = own building, but dont own land

Question 47

Where two or more loans are secured on a property, their priority is determined by the:WHAT?

Answer 47

Date of the registration

Question 48

Which of the following statements about tenancy in common is true?

Question 5 options:

Each joint owner has a beneficial interest equal to their agreed share of the property.

If one owner dies, the surviving owner can place a restriction at the Land Registry to prevent the deceased’s beneficiaries forcing a sale.

Once the surviving owner has been registered as the legal owner, they can sell the property.

Answer 48

Each joint owner has a beneficial interest equal to their agreed share of the property (this is what is passed to beneficiaries upon death, NOT THE LEGAL OWNERSHIP )

Its not B because beneficiary’s cannot force a sale anyway due to not being legal owners. The surviving owner must appoint a trustee to take the deceased ownership so they can sell and distribute the estate

Not C because of the reason above. There must be two legal owners to sell a joint property so the surviving tenant must appoint a trustee to take ownership. The trustee is normally teh late tenants representative or executor

Question 49

For a leaseholder to buy the freehold of their property, how many years must the original lease have remaining?

Answer 49

21 years

Question 50

Which of the following statements are false in relation to land tenure? Select all the false statements.

A) There may be some restrictions on what an owner can do with, or on, a freehold property.

B) Lenders generally prefer freehold flats to leasehold flats.

C) Lenders are usually reluctant to lend on property with a flying freehold.

D) Leaseholders may be required to contribute towards the cost of maintenance for common areas of the building.

E) For a 25-year mortgage on a leasehold flat, a lender would require an unexpired lease term of at least 30–40 years.

F) If the borrower fails to comply with the conditions of a lease, their rights are forfeited to the lender.

Answer 50

A = True…local authority restrictions etc

B= False
Lenders prefer leasehold flats because with freehold flats there is a lack of clarity about who is responsible for the common areas of the building

C= True, unless there is a clause which forces the landowner who has the flying freehold within their land to maintain the flying freehold or to allow others to maintain it by entering their land

D= True

E= A lender for a leasehold flat usually requires a minimum unexpired lease term of 55–65 years (Anything less is too risky for the lender )

F= False
If the borrower fails to comply with the conditions of a lease, THE FREEHOLDER has the right to claim forfeiture, the lease is cancelled and the leaseholder no longer has any rights to the property. This in turn causes the lender’s security to disappear

Question 51

With commonhold tenure, each individual unit holder:

owns their unit and an equal share of the common areas of the building.

owns their unit and a share in the commonhold association.

can choose whether to own their unit on a commonhold or leasehold basis.

Answer 51

B) Each unit owner owns their unit and a share in the commonhold association, a company owned by the shareholders. The commonhold association manages and maintains the common parts of the building.

Question 52

For a leaseholder to buy the freehold of their leasehold flat, what conditions must be met?

Note is says FLAT

Answer 52

At least two thirds of the flats in the block must be held on a long lease (over 21 years)

At least 50% of the owners in the block must agree to participate in the purchase.

Question 53

Andrea has 40 years left on the lease of her flat and meets the criteria to extend her lease. If she took advantage of this right, what would be the length of the new lease?

Answer 53

130 years

The extension would add 90 years to the existing term of the lease

Question 54

If Andrea extended the lease on her flat, she would need to negotiate a new ground rent figure as part of the arrangement.

Answer 54

False

No ground rent is payable on the extended period of the lease

Question 55

Which of the following is the technical definition of freehold land tenure?

Absolute term in possession for fee simple.

Estate in possession for fee simple absolute.

Estate in fee simple absolute in possession.

Estate in fee simple for a term of years absolute

Answer 55

Estate in fee simple absolute in possession.

Question 56

A legal charge is known in Scotland as a mortgage by demise. True or false?

True
False

Answer 56

False, a legal charge is known in Scotland as a standard security

Question 57

A ‘second mortgage’ is a further loan from the original lender. True or false?

True
False

Answer 57

False

False. A further loan from the original lender is known as a ‘further advance’.

Question 58

What is a further advance?

What is a second mortgage?

Answer 58

Further advance = A further loan from the original lender

Second Mortgage = A second loan for a different lender

Question 59

Where more than one charge is held over registered land, the order of priority for repayment in the event of default is determined by: what?

Answer 59

the date order in which the charges were registered.

Question 60

Gary had a property subject to a legal charge with the Pleasant Building Society, registered 15 years ago on 1 May, securing a loan of £140,000, and a legal charge with the Consolidated Loans company, registered 10 years ago on 11 July, securing a loan of £30,000. Gary defaulted on his loans and the house was taken into possession and sold for £160,000 on 10 May this year. Who would get what from the proceeds of the sale?

Answer 60

Pleasant Building Society would receive £140,000 and Consolidated Loans would receive £20,000

First charge must be met in full first. Anything left over goes to 2nd charge and so on until all debt is paid, where anything remaining is given back to the borrower, or the borrowers money runs out

Pleasant Building society is first charge because the registration of their loan is before the consolidates loans

Question 61

Keith and Linda have just married. They have both been married before and each has two adult children. Each has a house of their own, but they have now decided to sell them and buy a home together. Which ownership arrangement would enable them each to leave their share of the property value to their children on their death?

Joint tenancy.

Ownership in one name with the partner as a beneficial owner.

Joint and several tenancy.

Tenancy in common

Answer 61

Tenancy in common

Question 62

Why might it be inadvisable for a leaseholder with 20 years remaining on their lease to put their flat on the market?

There might be legal issues.

It might have to be sold far below the going market rate for similar properties.

It might take a relatively long time to complete the necessary paperwork

Answer 62

It might have to be sold far below the going market rate for similar properties.

Question 63

Iliana owns one of two flats in a converted house on a leasehold basis. She and her fellow leaseholder cannot buy the freehold of the property because it is too small to qualify under the commonhold legislation. True or false?

Answer 63

False. A building need only contain a minimum of two flats in order for the leaseholders to have the right to buy the freehold.size doesnt matter