Lease extensions: can you insist on a mortgagee protection clause?

Agreeing the premium is an important stage in lease extension process and this then takes the parties to the next stage of agreeing the lease extension deed that will ultimately be registered at the Land Registry. Where a flat is being sold or remortgaged alongside the lease extension process, can be a time when a conveyancer requests additional changes, including a mortgagee protection clause (MPC).

Such a clause can provide useful contractual protection for a lender. However, a statutory lease extension does not give either party an unrestricted right to rewrite the lease; which is positive as this protects the leaseholder. Whether an amendment put forward by a leaseholder can be required depends on the existing wording of the lease, the evidence and the legal rules governing the new lease.

What is a mortgagee protection clause?

In this context, a mortgagee protection clause usually requires the landlord to notify a lender before taking steps to forfeit the lease and allow the lender an opportunity to remedy the breach; in real terms this might mean a chance to step in and pay unpaid service charges or ground rent, before the lease is forfeit. Forfeiture is the process by which a landlord seeks to end a lease because the leaseholder has breached its terms.

The clause helps protect the lender’s security. For example, it may allow the lender to pay arrears or address another breach before the landlord proceeds. Its precise effect depends on its wording.

What changes are permitted during a statutory lease extension?

The relevant rules are set out within the Leasehold Reform, Housing and Urban Development Act 1993. Subject to the changes required or permitted by the Act, the new lease generally carries forward the terms of the existing lease.

Section 57(6) allows the landlord and leaseholder to agree changes. It also permits either party to require an existing term to be excluded or modified where:

• Under section 57(6)(a), this is necessary to remedy a defect in the existing lease.

• Under section 57(6)(b), changes since the commencement of the lease make it unreasonable to retain the term unchanged

  
  

These are separate grounds. Neither party can insist on an amendment simply because it would prefer more modern or more favourable wording (and we often have to push back against freeholders who would like to introduce a whole new lease, because it suits them to do so, despite what the rules actually say). Whilst freeholders do not have carte blanche to introduce changes that benefit them, the strictness of the rules works both ways, and a conveyancer’s request, or a particular lender’s requirement, does not automatically establish a statutory entitlement to change the lease.

The strongest guidance: Waitt and Rossman

The most useful guidance we have identified is Waitt v Morris [1994] 2 EGLR 224, read alongside the much more recent Upper Tribunal’s express approval of its reasoning in Rossman v The Crown Estate Commissioners [2015] UKUT 288 (LC).

In Waitt, the tenant sought a clause requiring the landlord to give the tenant’s mortgagee 21 days’ notice of forfeiture proceedings. The Tribunal refused the request. It considered that the provision might be convenient, but was not necessary to remedy a defect in the existing lease.

In Rossman, the Upper Tribunal expressly endorsed that distinction when explaining the demanding test of necessity that must be applied under the relevant legislation. Although Rossman was itself about service charge provisions, rather than an appeal concerning a mortgagee protection clause. It therefore provides authoritative guidance on the legal test, with express approval of the reasoning in Waitt, rather than a direct Upper Tribunal determination of whether a mortgage protection clause can be argued to be a necessary update to the lease.

Our view is that these decisions provide the strongest guidance against treating the absence of mortgagee protection wording as an automatic defect. There is however likely to be further more direct case law on this point in future, given the number of requests we see now for an MPC to be included.

Do lenders already have legal protection?

There are existing safeguards even where the lease contains no express mortgagee protection clause.

The Civil Procedure Rules (CPR) address possession proceedings involving forfeiture. Where the claimant knows of someone, including a mortgagee, entitled to seek relief against forfeiture under the provisions specified there, the particulars of claim must identify that person and a copy must be filed for service on them. In reality this already ensures the mortgage company must be put on notice of enforcement; it already does the job of a mortgage protection clause and there is no need to change to the lease to benefit from this existing legal right.

It is not identical to a contractual obligation to notify the lender before proceedings and allow a specified period to remedy a breach, and of course the CPR can and does change, but it is unlikely to strip out a long standing and sensible protection designed to benefit lenders. Existing protections are therefore relevant to assessing the risk, but do not necessarily satisfy every lender’s requirements.

Why the draft lease stage isn't a free-for-all to change the lease

The Leasehold Reform Regulations 1993 govern aspects of the conveyancing procedure that kick-in once the lease extension premium is agreed.

The rules require the landlord to supply the draft lease within 14 days after the terms of acquisition are agreed or determined. This then provides 14-day periods for the leaseholder’s proposed amendments and the landlord’s response.

These procedural rules do not create a general entitlement to demand additional clauses simply because one party or the other would like to include these.

Where a sale or remortgage is involved, the conveyancer should identify the precise lender requirement early. The lease extension solicitor can then assess whether the amendment is legally justified, can be negotiated or if alternative options to changing the lease may be more proportionate.

Taking a realistic approach

Ricky Coleman, founder of Peppercorn Law, explains:

“When we handle a lease extension for a flat that is due to be sold, conveyancers sometimes use the opportunity to put forward a shopping list of ‘nice-to-have’ amendments. Their concerns may be understandable, but as leasehold lawyers we work within strict legal rules about what can be changed.

We also understand the practical nuances of dealing with large freehold owners and the bargaining power of those involved. It is not always possible or desirable to change a functioning lease to address a theoretical issue that might arise in the future.”

A lender’s requirement can be decisive for a particular sale, even where the legal basis for compelling the landlord to accept an amendment is uncertain. The practical decision should take account of the existing wording, the lender’s position, the strength of any statutory argument, and the likely cost and delay.

At Peppercorn Law, we assess proposed amendments in the context of the existing lease and your transaction, helping you understand which changes are necessary, which can reasonably be pursued and how they may affect completion.

Find out more about our fixed-fee lease extension service and how we can help with agreeing the terms of your new lease.