Q&A - Tenant insolvency clause

QUESTION:

Dear Editor

We have agreed to buy a 90 year extension of a flat in Cadogan Square following a binding decision. At the eleventh hour the bank have advised that they cannot lend as there is a tenant insolvency clause in the lease.
Is there anything we can do to make the freeholder remove this clause?

Name Withheld

ANSWER:

The reason the bank will not lend is that if you should go bankrupt then the lease is automatically forfeit. You as the tenant could possibly apply to the court for relief against forfeiture but your bank as mortgagee almost certainly cannot. Hence the bank have no security for their money.

The best thing to do in these circumstances, unless it has already been argued this way, is for you to withdraw your application for the 90 year lease extension and to reapply in 12 months time. When you do so the valuation should be different because the value of the extended lease should be calculated by reference to a lease with a bankruptcy clause which should be significantly lower than the value without such a clause. The same of course would apply to the value of the existing lease if there is such a clause in your existing lease but there many not be. Proceeding this way should result in a lower price for the lease extension, all other things being equal save that the lease will be a little shorter which may have some valuation consequences. You can then suggest to the freeholder that you are prepared to pay the premium on the basis that there is no such clause, being a higher premium, but otherwise threaten to proceed at the lower figure although of course you may have diffulty in financing it.

The only alternative is to approach the freeholder now to ask whether he would agree to vary the proposed lease for a premium in order to withdraw the bankruptcy clause.

Eric Shapiro, Director Valuations, Chesterton-Humberts