QUESTION
I wonder if you have any advice regarding Sharia finance as conveyancing. Solicitors and freeholders I have contacted are not very clear on these. We are presently handling our first conveyance where Sharia finance is involved and it is proving very complicated.
From my research I have deduced when an Islamic sharia lender funds a leasehold purchase the lender becomes the head lessee and issues a sub-lease to the borrower usually for about 99 years even when the original lease is for much longer. Most leases do not allow under letting other than on an AST and for no longer than 3 years without consent. We have referred our case to the freeholder to take the lead regarding consent and we propose to fit the management company in around their requirements. However, consent for underletting for this length of time will require the creation of an under lease which is not permitted in the original lease. The format of how this is handled is crucial as there are a further 100 leasehold properties on this site and if it is not done correctly, could cause future issues which worries us. It will put the lease out of step with the other leases. The lender also wants the management company to recognise the under lessee as the company member. Further, who signs the Deed of Covenant? How do you serve the service charge demands as we would normally demand from the head lessee (we only have a scenario where the properties are shared ownership with a registered social landlord being a head lessee) but this lender would prefer the demands are served on the under tenant. Who do you pursue for breach of lease and who do you pursue for any debts? (We normally deal with the RSL’s on these points in shared ownership). How do you make the contractual connection between the management company and the under tenant. Does a freeholder or management company in a tri party lease have the right to refuse the sale of a property if the buyer is using this type of funding?
I would be very interested to know if you have any information on this type of funding and the consequences.
ANSWER
There are 5 different types of Islamic Financing and without sight of the proposed master financing agreement and the Lease which is to be assigned , I would find it impossible to answer all the questions raised.
A General Overview:
It reads as though the enquirer is considering the Ijara (rental) variety of Islamic mortgage. Ijara is a lease of an item by its owner to a customer and Ijara wa Iqtina is a lease of an item usually followed by the eventual sale of the item to the customer at the end of the lease term.
In the case of a property purchase using Ijara wa Iqtina, the bank will purchase the property chosen by its customer for an agreed price and then will grant a lease to the customer. The lease will usually be long enough to require registration under the Land Registration Act 2002.
The customer’s monthly ‘mortgage’ payments will normally comprise both the rental payment as well as an amount held by the bank to act as a guarantee that the customer will be able to pay for the purchase of the property at the end of the lease term. The monthly ‘mortgage’ payments are fixed in such a manner that the bank gets back its principal sum along with some profit. The bank also gives an undertaking to the customer to transfer the reversion of the property to the customer at the end of the term or when the arrangement is ended.
When the customer wants to sell or end the arrangement, they can give notice at any time to the bank and the property is then either transferred to the customer for the price originally agreed less the on-account payments, or the customer can direct the lender to sell on to a third party, arrangements being made for the termination of the lease.
The Master Ijara agreement would call upon the Borrower to take a long lease of the property back from the lender and covenant to adhere to the terms of the banks superior Lease with the Landlord (including the payment of all service charge and rents). The landlord would usually require sight of that agreement and approval of the proposed form of occupational lease. Most Leases do permit the grant of an underlease that does not provide for Security of tenure at the end of the term.
Islamic finance products are becoming increasingly popular and standardised and I am of the opinion it would be dangerous for any landlord to refuse the Ijara structuring on the presumption such a refusal would be deemed discrimination on the grounds of religion.
I am sorry I could not provide exact answers to your reader’s questions, but I do hope this has proved of some use to you.
Alyson Thornton-Clark, Partner at Child & Child
