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
Lease Extension – Statutory Process
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.
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).
Sometimes is it 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.
Lease Extension by Agreement
As an alternative to the statutory procedure outlined briefly above, the landlord and tenant can agree to extend the lease without formal notice.
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 an 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.
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 extending 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 value.
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.
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