Although the legal requirements when buying a repossessed property are basically the same as when buying any other; there are some issues that arise from the fact that the lender has no personal knowledge of the property and that the transfer will be under a power of sale.
You can end up with a bargain, but you need to prepare for the fact that the lender’s solicitors will not be able to answer the vast majority of your enquiries, will expect you to do all the legwork (and bear any associated costs) and will set and stick to tight deadlines.
Raising Enquiries on a Repossessed House
The lender will obviously never have occupied the property and consequently will not be able to answer the usual enquiries that would be raised of an owner-occupier. There could be a Property Information Questionnaire in the Home Information Pack if it was first marketed when this was required, though it may not contain the specific information you are looking for; and in the place of a Property Information Form there will usually be another, much shorter document, which basically points out that you must rely on your own investigations.
Some estate agents such as Fulham letting agent, sell repossessed property on behalf of lenders, so they may be able to help with information regarding the property
There will be certain things, such as planning permissions, NHBC certificates, building control completion certificates that you will need but the lender will often not hold. You may ask the lender’s solicitors to obtain copies however they are under a duty to mitigate costs and will usually advise that you must obtain them at your own expense. Although they may suggest indemnity insurance for certain things, most standard policies will require you to confirm certain things that only a person with past knowledge of the property could confirm, for example in respect of lack of planning permission, that the work that has been done is at least 12 months old. You may therefore need to obtain a bespoke policy, which if it can be obtained at all would be more expensive.
As the seller won’t be able to give you any information about any disputes, it is worth trying to speak to the neighbours to check if there are any issues, such as access or boundary disputes, that you ought to be aware of.
The lender’s tactics when disposing of properties are to do so as quickly and cheaply as possible and limit any liability which it might have following to completion the minimum possible. This can be frustrating for a purchaser but it has to be remembered that they have a duty to the repossessed borrower to act in such a way as to mitigate their loss.
Contracts with Repossessed Homes
Most lenders will have a standard form of contract to which they will not accept any amendments. Some of the clauses may appear (or in fact actually be) unreasonable, however it is not usually worth arguing for amendments, a lender will often prefer to withdraw from the sale then agree to amend the contract. It might be necessary to insist that exchange and completion takes place simultaneously, which will deal with the fact that you will be responsible for the property between exchange and completion and the reluctance by some lender to contract to give vacant possession (because of the possibility of squatters breaking in following exchange). Lenders will usually agree to this, as obviously they won’t have an onward purchase to worry about.
One common amendment made to the standard conditions of sale that you need to be aware of is the number of days, following service of a notice to complete, in which you must complete before the seller’s right to rescind arises. Under the standard conditions this is 10 working days however it is often amended to 5.
Lender’s solicitors will often use the special conditions to disclose any defects that might put you off buying the property. Their client is under a duty to disclose such defects as it is aware of but doesn’t really want you to know about them.
Some of the standard contracts will have over 50 special conditions and although they should, some property conveyancers will fail to read them properly, reasoning that since no amendments will be accepted, there is no point. It is not uncommon therefore to see a condition along the lines of “The Buyer’s attention is drawn to the fact that the owner of the neighbouring property has verbally informed the Seller that he intends to take legal action to challenge the position of the boundary. The Seller has no further information and the Buyer shall not raise any requisitions in this regard”. You must make sure that you read the contract thoroughly before signing.
Deadlines for Exchange and Completion
A deadline will be imposed requiring exchange of contracts to take place by a given date, typically 28 days (if buying with a mortgage) or 14 days (if buying cash) from the date that your offer is accepted. It is important therefore that you have a solicitor already in place before you make the offer so that there is nothing to delay the seller’s solicitors from issuing contract papers.
If you are obtaining a mortgage do all you can in terms of submitting your identification, proof of earnings etc before you offer on a property so as to minimise delay afterwards.
Make sure that you are aware, and you make your solicitor aware, of any deadline and if it is not met, expect that the lender will withdraw from the sale. Having said this, if the property is still available for sale when you are ready to proceed they may be prepared to reinstate the offer.
Lender’s Obligation to Get the Best Price
Ordinarily, once you’ve had an offer accepted on a property it will be taken off the market. However, that will not usually be the case when buying a repossessed property. This is because the lender is obliged to get the best price reasonably achievable and must therefore consider any offers received right to the point of exchange. The possibility of being gazumped at the last minute is a risk you must accept when buying from a lender in possession.
Another effect of the obligation to get the best price is that the lender will have to place a notice in the local press and/or on a property website, such as Rightmove, when an offer is received. This is called the “public notice” and contracts cannot usually be exchanged until a week after the notice is published. It will be entered by the selling agents and should be done immediately, however it is sometimes overlooked and can cause a delay to exchange. Either the lender’s solicitors or the lender’s asset manager will need to be in possession of the notice before exchange takes place.
Service Charge Arrears & Retentions
Under the standard conditions of sale the seller is responsible for all arrears of ground rent and service charges which are outstanding as at the day of completion. Where the amounts are unknown, for example because there will be a balancing service charge covering the period of the seller’s ownership which will not actually be applied to the account until after completion, it is usual for the seller’s solicitor to hold back a portion of the sale proceeds to cover this liability. This is known as a “retention”. A lender will not however agree to hold a retention. This is because it will want to close the mortgage account as soon as the sale completes, and also if it suffers a loss it will need that loss to crystallise (which means the exact amount of loss will need to be known) before it can claim on any insurance policies or pursue a valuer for negligence etc. It may agree to an allowance instead of a retention, which may actually be more advantageous to the buyer.
The contract will usually be drawn so as to remove any liability on the lender for ant arrears of which they were not aware on completion so it’s important to check the position before completion and it’s a good idea to pass any arrears details to the lender’s solicitors. This way they can’t claim they are not liable because they were not aware.
Transfers Under a Power of Sale
Ordinarily a seller would transfer the property using form TR1 and would need to repay all mortgages on the property. A lender however will use form TR2 (transfer under power of sale). This operates jointly as a transfer and as a discharge of the lender’s charge. Also, it means that any interests subsequent interests, such as charges or bankruptcy restrictions registered after the lender’s charge will be automatically removed from the title by Land Registry when the transfer is registered without the need for discharge documents. Any interests which have priority of the lender’s charge will still need to be dealt with in the normal way. Where the lender has more than one charge it is important to check that they are selling under their superior charge (the date of the charge will be specified in the TR2). If they are not they will need to produce a discharge document for their superior charge and any other charges which have priority to the one under which they are selling.
It should be noted that establishing the priority of interests is not always straightforward and you should always therefore seek legal advice when buying a repossessed property with more than one interest registered. If you fail to obtain a discharge document for an interest which is not overreached by the lender’s power of sale you may end up being bound by it which can be extremely costly.
The lender’s solicitors will normally provide their standard replies to requisitions on title with the contract papers at the outset. There will not usually any undertakings to redeem any charges (see above). You should check the location of the keys.
You will often find that the lender’s solicitors will not be able to provide a transfer on completion but rather that the lender will contract to send it on within, say, 7 or 14 days of completion.