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In this second article in our series on due diligence in relation to loan portfolio acquisitions, we look at the issues around fire safety, ground rents and the accuracy of Land Registry title information.
Cladding and unsafe high-rise buildings in general is something lenders have been grappling with for several years now, and most will have their own policies and lending criteria covering this issue. It is, however, still important to bear this in mind when acquiring a mortgage portfolio.
Acquirers should have a clear understanding of the seller’s policies in this area as well as visibility of the nature of the portfolio. For example, the acquirer should find out what proportion of the portfolio comprises mortgages over flats contained in relevant buildings and how that compares to its existing portfolio.
The acquirer should also find out what diligence the seller has done in relation to such buildings. It will not be practical to inspect or obtain EWS1 certificates for all relevant buildings, but significant steps can be taken to ascertain the potential risks by undertaking desktop searches. Acquirers may also check the Building Safety Information Portal run by the Fire Industry Association, which is a voluntary repository for EWS1s forms for buildings over 18 metres tall.
The recent government announcement that it is seeking to force developers to pay for cladding remediation costs for all buildings may, in time, reduce the risk for mortgagees in this area. However, detailed proposals have not yet been seen and only time will tell how effective these efforts will be in reassigning the risk and cost.
It is also worth remembering that the fire safety issue extends beyond cladding. The arrangement and construction of balconies is important, as are other fire safety and fire stopping measures. In short, a lender or acquirer needs to know the number of flats in its portfolios that may be affected by such matters, and make allowances accordingly.
The Building Safety Bill will be passed in 2022 and this will change the landscape further.
Concerns about escalating ground rents is also familiar ground, but again should not be forgotten when acquiring a portfolio of mortgages. While the newest mortgages shouldn’t be affected, leases that are more than a few years old may have provisions for ground rent increases that will quickly outstrip inflation, such as those that double every ten years. Such leases can be unsaleable.
In some cases, steps are being taken by the original developers to vary the relevant lease terms. However, this is potentially a slow process that may well include the subsequent acquirer of the ground rent reversions.
We have undertaken several reviews of portfolios for clients where we have identified leases that contain problem clauses or are otherwise outside their normal lending parameters. Such a review should be considered by an acquirer where this is likely to be a material issue.
There is an inevitable delay between the completion of a transaction and its registration at the Land Registry. In some cases, such delays can run to six months or more, depending on the nature and complexity of the application. Acquirers of mortgage portfolios need to be aware of this when undertaking due diligence on a portfolio.
Up to date official copies of titles will not be available where there are pending applications, so the information in the official copy will be backdated to the date of the pending application. These applications may be for the sale of the property or part of it, the grant of a registerable lease, or the release of an existing charge.
Where there are pending applications, efforts should be made to interrogate their nature and, if possible, obtain suitable warranties from the seller.
Getting the scope of due diligence right on the acquisition of mortgage portfolios is key and, as regards the underlying properties, it must in many cases go beyond simply checking for the existence of a legal charge, its terms and registration. The fire safety and ground rent position should be verified against the acquirer’s criteria and risk appetite in respect of these issues, so that risks can be identified and factored into the sale process accordingly.
This article was first published by Mortgage Finance Gazette
25 January 2022