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 the lease or buying the freehold (enfranchisement).
Lease Extension Entitlement
A leaseholder is entitled to extend their lease to an additional 90 years and to reduce their ground rent to a peppercorn, meaning they are effectively no longer paying ground rent. Providing the property is a flat which has been owned by the leaseholder for a minimum of two years and holds a long lease 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.
We would always recommend that you extend your lease when you have 81-83 years remaining on the current term. If there is less than 80 years left on the lease at the time of extension then an additional valuation factor, referred to as a marriage value, is included in the valuation calculation, making it far more costly to extend the lease after this milestone has passed. The leaseholder is also responsible for the landlord’s reasonable costs in extending the lease. If these costs are disputed between parties, the First-tier Tribunal (Property Chamber) (FTT) can determine whether the fees are considered to be reasonable and will decide the appropriate action. Extending the lease in this way involves no change of landlord so management of the property continues as before.
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 would serve notice on the landlord that they wish to extend their lease. The landlord then has two months to reply; either accepting the right to the lease extension or to 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, whether they opt for a much longer term such as 999 years or a shorter term such as an additional 20 years. They can commit to any length of term and any premium to be paid. Using this method there is no requirement for the Landlord to reduce the ground rent to a peppercorn, although they could agree to do so if they wished.
The main disadvantage of not using the statutory procedure is that there is no ability to apply to the court or the FTT in the event that agreement cannot be reached or either party is causing delay. It is hoped that agreement on all points could be reached in principle in advance; allowing an Agreement for Surrender and New Lease to be employed at the outset, with a small deposit paid to ensure the matter proceeds to completion.
How SLC Solicitors can assist
If you are a freeholder, a landlord or managing agent SLC can assist you with;
- properties where the leases have fewer than 83 years left on their term
- the preparation of all documents required for the lease extension
- the premium valuation and marriage value where applicable
- helping to produce welcome capital sums for yourselves
- helping to make the property more marketable for leaseholders, increasing potential sale value
- the conveyancing of the new lease
If you are the leaseholder of a property SLC can assist you with;
- serving notice on the landlord to trigger the Statutory procedure
- responding to requests from the landlord on your behalf
- responding to any submissions of a Counter-Notice from the landlord
- Phone: 0333 0300 200
- Email: email@example.com