A flat with a long lease is a valuable asset. However, as time passes the length of time remaining on the lease gets shorter and the lease will eventually come to an end and revert to the head landlord or freeholder.
When the time remaining on the lease falls below 80 years many high street lenders will refuse to grant a mortgage on the property and so the open market value of the property is detrimentally affected.
The Leasehold Reform Housing and Urban Development Act 1993 gives residential leaseholders the statutory right to protect the value of their asset by either:
EXTENDING their lease or BUYING the freehold (enfranchisement).
A leaseholder is entitled to a lease extension for an additional 90 years and to reduce their ground rent to a peppercorn (effectively no longer paying ground rent).
So long as the leaseholder has owned the flat for two years, holds a long lease and the property is a flat, then the landlord cannot refuse to grant a lease extension.
For example – if a lease is dated 1st of September 1990 and the term is 99 years commencing on 29 September 1990 – then the original term expires on 28 September 2089. If the lease is successfully extended then the new term will expire on 28 September 2179 – i.e. 90 years after the original term expiry date.
The leaseholder pays a premium to the landlord for granting the lease extension in order to compensate the landlord for the loss of rent.
If there is LESS THAN 80 years left on the lease at the time of extension then an additional valuation factor, marriage value, is included in the valuation calculation. This makes it much more expensive to extend once this milestone has passed. We recommend that you extend when you have 81-83 years remaining on your lease.
You will usually need to instruct a valuer with experience of this type of transaction to advise you on the premium that you should propose as a notice requiring a lease extension can be invalidated by an unrealistic premium.
The leaseholder is also responsible for the landlord’s reasonable costs in extending the lease (the First-tier Tribunal (FTT) can determine whether the fees are reasonable in the absence of agreement).
Extending the lease in this way involves no change of landlord so management of the property continues as before. If, however, other leaseholders in the block decide to collectively buy the freehold – then that application takes precedence over the lease extension, which is suspended until the freehold is acquired (or the attempt fails).
Sometimes it is appropriate to vary the lease provisions at the same time as the extension to bring the lease into line with current practice or to rectify unworkable provisions if applicable.
The leaseholder serves notice on the landlord or landlords. The landlord has two months to reply to accept the right to the lease extension or dispute it. The landlord can only dispute the right on very narrow grounds.
Usually negotiations take place between the parties on the premium to be paid and the provisions to be contained in the new lease. The statute allows six months for the terms to be agreed or either party can apply to the FTT for them to determine the terms of the new lease. The new lease takes effect by surrendering the old lease and re-granting the new one. The new lease is then registered at the Land Registry.
Alternative consensual method
As an alternative to the statutory procedure outlined briefly above, the landlord and tenant can just agree to extend the lease.
The main advantage of this type of lease extension is flexibility, the parties can agree on the term of the new lease (a much longer term such as 999 years or a shorter term such as as additional 20 years or any other term) and any premium to be paid, and there will be no requirement for the Landlord to reduce the ground rent to a peppercorn, although they could agree to do so.
The main disadvantage of not using the statutory procedure is that there is no ability to apply to court or the FTT in the event that agreement cannot be reached or either party is causing delay.
However, it is hoped that agreement on all points could be reached in principle in advance and an Agreement for Surrender and New Lease may be employed at the outset – and maybe a small deposit paid – to ensure the matter proceeds to completion.
How SLC Solicitors can assist
If you are a freehold owner, landlord or managing agent who owns or manages a block where the leases have fewer than 83 years to run or are about to hit that threshold in the near future then you may like to canvass the leaseholders about their rights to extend their leases. For the landlord it may produce welcome capital sums and for the leaseholder it will render their properties more marketable and increase the sale values.
SLC can act for freeholders/landlords or for leaseholders individually or in a group action either to implement the statutory process or to extend the leases by mutual agreement.