8.2 Deed of Substituted Security on Informal Lease Extensions

Edited by Ashley Connell

Leasehold Enfranchisement Solicitor at Hetts

Introduction

Mortgagee consent is crucial in informal extensions if the property is subject to a mortgage, primarily because the surrender and re-grant mechanism disrupts the continuity of the lender's security. Under general property law, the act of extending the lease term by deed does not simply amend the existing lease; it effectively terminates the old lease (surrender) and creates a new leasehold estate. This means the original mortgage, which is charged against the surrendered lease, would cease to apply unless steps are taken to transfer or substitute the security to the new lease. Without this, the lender's interest could be lost or diminished, leaving the leaseholder in breach of mortgage terms and potentially unable to register the new lease at HM Land Registry. Consent ensures the lender agrees to the new terms, protects their financial stake, and complies with any restrictions in the mortgage deed that prohibit alterations to the lease without approval.

The primary vehicle for obtaining and formalising this consent is a deed of substituted security. This document serves to substitute the security by releasing the charge from the old (surrendered) lease and applying it to the new extended lease, thereby maintaining the lender's priority and rights without the need to fully discharge the existing mortgage and execute a fresh one (which could incur additional costs like stamp duty land tax or arrangement fees). It typically includes clauses reaffirming the original mortgage provisions, charging the new leasehold estate, and confirming the lender's consent to the extension. The deed is executed by the leaseholder, the lender, and sometimes the landlord, and must be lodged with the application to HM Land Registry for registration of the new lease. If the leaseholder is a company, the deed may also require registration at Companies House under section 859H of the Companies Act 2006.

Why a Deed of Substituted Security is Needed in Informal Extensions

The necessity arises from the legal treatment of informal extensions as a surrender and re-grant under common law principles, as outlined in section 52 of the Law of Property Act 1925, which requires leases over three years to be granted by deed. Unlike statutory extensions, there is no automatic statutory transfer of charges (as per section 58(4) of the LRHUDA 1993), so the deed bridges this gap by:

• Preserving security continuity: It prevents the mortgage from being extinguished upon surrender, ensuring the lender retains a charge over the property's value, which is enhanced by the extension.
• Complying with HM Land Registry requirements: The registry will not complete registration without addressing existing charges; a deed of substituted security (or a full discharge and new charge) is required to remove encumbrances from the old title and note them on the new one. Failure to provide this can lead to requisitions (requests for further information) or rejection of the application.
• Protecting against risks: Without it, the new lease might be registered subject to the old charge, but this could create uncertainties, such as the lender's rights not fully extending to the new term, or potential priority issues with other interests.
• Facilitating lender approval: Lenders often charge administration fees (typically 100 to 300 pounds plus VAT) for reviewing the new lease and executing the deed, but this is preferable to the alternative of discharging and re-mortgaging, which might trigger early repayment charges or higher interest rates.

In practice, the leaseholder's solicitor will contact the mortgagee early in the process to ascertain their preferred approach, deed of substituted security or discharge and new charge, and obtain a consent letter or the executed deed. This step is essential even if there is no restriction on the title requiring consent, as mortgage terms usually mandate lender involvement for any lease alterations. For sub-leases or head leases, additional consents from intermediate landlords or their lenders may be needed, complicating the process further.

Potential Pitfalls and Considerations

Common issues in informal extensions include delays from lender negotiations, higher costs if the premium is not competitively valued (without tribunal oversight), and the risk of unfavourable terms if the landlord has stronger bargaining power. Leaseholders should engage specialist solicitors and valuers experienced in leasehold law to mitigate these. If the lease is under 80 years, informal negotiations might still incur marriage value (shared increase in property value post-extension), though not statutorily split 50/50 as in formal cases. Ultimately, while informal extensions can be quicker and cheaper if amicable, the requirement for mortgagee consent via a deed of substituted security underscores the importance of early lender engagement to ensure a smooth transaction.

Statutory Route

Mortgagee consent is not required for the transfer of the existing charge (mortgage) to the new extended lease. This is because section 58(4) of the LRHUDA 1993 provides a specific legal mechanism that automatically transfers any charges or encumbrances from the surrendered (original) lease to the new lease upon its grant. This statutory protection ensures continuity of the lender's security without the need for additional documentation or explicit consent to the security transfer itself. The process is designed to streamline extensions for qualifying leaseholders, avoiding unnecessary administrative hurdles while safeguarding the mortgagee's interests through legislation rather than contractual agreement. However, in practice, leaseholders may still need to notify their lender and obtain confirmation that the new lease terms are acceptable under the mortgage conditions, though this does not equate to formal consent for the security substitution.