- Whether you own a house or a flat, owning a leasehold means that you have a specified number of years to use the land subject to the conditions set out in a legal contract – the lease. There is usually a ground rent to pay and like any contract if the terms, known as covenants are breached, there are consequences.
- Before buying a leasehold ensure you check the length of the lease and ground rent, which are crucial to calculating the Premium for any lease extension. Historically, flat leases were usually for a term of at least 250 years with a peppercorn ground rent (essentially, no ground rent
- However, in more recent times freeholders have become shrewder, especially after the 2008 credit crunch. As the property bubble had burst, developers had to sell their developments for less than the price they had predicted they were going to achieve when the market was at its highest. Developers became creative on how to recover the money lost from the purchaser and this was typically done by granting a shorter lease of between 99 – 250 years and reserving a higher ground rents that increase periodically.
- There are 2 ways to extend your lease:
- Informal Route – Any leaseholder, whether or not they qualify for the statutory right to extend their lease can negotiate an open market deal.
- Under the informal lease extension process, the advantages include that you and the freeholder can negotiate the terms, the premium and any other associated costs and the whole process can be quicker as there is no control over timing, it can be instant if both parties are willing. A leaseholder has the option to just ‘top-up’ the lease term for a smaller premium if they are wanting to make the lease attractive to potential buyers.
- However, the disadvantages include that you are not protected by the safeguards provided by law around the calculation of the premium and any intermediate landlords interests and despite having spent time and money either party can withdraw from the process at any time until the contract is concluded. If an agreement cannot be reached there is no recourse to the Tribunal without triggering the statutory process.
- Statutory Route – Qualifying leaseholders have a legal right under the Leasehold Reform Housing and Urban Development Act 1993 (as amended) (LRHUDA 1993) to extend their lease.
- The advantages include that that as the whole process can take around 6-9 months, the leaseholder has time to find fund and there are statutory safeguards to compel the freeholder to extend the lease, how the lease premium is calculated and the terms to be put in place. In addition, any charge over the existing lease is automatically transferred to the new lease under Section 58(4) LRHUDA 1993 and the freeholder’s costs are controlled under Section 33 and Section 60 LRHUDA 1993.
- The disadvantages include that from the service of the Tenants Notice, both parties are locked in to the process and there is no guarantee about the premium payable at the outset. This is why we recommend that a valuation is carried out before the service of the Tenants Notice so that you have a realistic idea of what the premium ought to be. If an agreement cannot be reached there is a recourse to the Tribunal.
- Statutory Right to Extend Your Lease LRHUDA 1993 provides qualifying leaseholders to extend the lease on the following terms:
- An additional 90-year term to the unexpired term. For example, if you have 50 years left to run on your lease, after the lease extension you will end up with a lease with an unexpired term of 140 years
- A lease on exactly the same terms as that which you have at the moment (subject to minor up-dating) and
- All for a “peppercorn rent” (i.e. nil rent for the remainder of the term). Generally speaking, to exercise the right under the 1993 Act you must have a lease originally granted for a term of more than 21 years and you must have held your lease for at least two years
- Essentially, the 3 criteria a leaseholder of a flat must meet are:
- 100% of the property is owned (i.e. not a specific percentage as in staircasing schemes)
- The lease was originally granted for a term of more than 21 years
- The leaseholder has held the lease for at least 2 years.
- The Premium -The “premium” is the price payable to the landlord (and any intermediate landlords) for the new lease. We would highly recommend that you obtain specialist valuation (which we can undertake for you) to calculate the price. Be aware of lease extension calculators as they can be misleading.
- The premium is calculated under the criteria set out in Schedule 13, Part II LRHUDA 1993, and is the total of:
- the reduction in the value of the landlord’s interest in the flat; that is, the difference between the value of his interest now with the present lease and the value of his interest after the grant of the new lease with the extra 90 years.
- the landlord’s share of the marriage value;
- compensation for loss arising from the grant of the new lease. The reduction in the value of the landlord’s interest is, effectively:
- the loss of the income from the ground rent for the remainder of the original term (as the whole term of the new lease will be at peppercorn rent);
- the loss due to the additional 90 years wait for the reversion (the surrender of the flat at the expiry of the term).
- The freeholders will usually also instruct their own valuer and you will normally be liable for their valuers costs also.
16 . Statutory Lease Extension Process – The basic leasehold extension process is as follows:
– Under LRHUDA 1993, a Section 42 Tenants Notice must be served upon the freeholder and upon any intermediate landlords.
– Although there is no prescribed form, the tenants s,42 notice must include specific detail set out in legislation, including the details of the lease, the freeholder, the premium you wish to offer and any additional proposed terms or covenants. If the tenants s.42 notice does not contain all the relevant information then it will be invalid.
- The tenants s.42 notice triggers a timetable set out in legislation for the parties to follow. In brief:
– The Freeholder has just over 2 months to serve a counter notice to either propose new terms or accept or reject your proposed terms.
– From the service of the counter notice the parties have 2 months to negotiate the terms of the new lease.
– The date terms are agreed triggers the timetable for the conveyance and completion.
- Disputes & Missing Freeholders – If a dispute arises in relation to the premium or terms, an application to the First-Tier Property Tribunal can be made within a set time limit to independently adjudicate the terms.
If the freeholder fails to serve a counter notice, or respond at all or is missing an application can be made to the County Court for a ‘Declaration’ or ‘Vesting Order’. These situations do not bar you form exercising your rights and our experts can assist you with this if such a situation arises.
- Transferring The Right To Extend The Lease – If you are considering buying a leasehold flat with a short lease, you should negotiate with the current owner to exercise their right to extend the lease and pay some of the costs. Under Section 43 of LRHUDA 1993, once the statutory right to extend has been exercised it can be transferred to the owner.
- Why You Should Extend Your Lease – Once there are 80 years or less remaining on the lease term, the value of the property drops and the value of the freehold increases. Therefore, the cost of extending your lease becomes more expensive.
In addition, your property may become less marketable as buyers will be vary of the problems and the high-street mortgage lenders will not be able to lend against it. Therefore, if you have a shorter leasehold, you should think about extending your lease as early as possible.
- Obtain Expert Advice – You really need to obtain advice from professionals who are experts in this complex area of valuation and law, although lease extension calculators are available online they cannot be relied upon and may leave you paying more than is necessary.
At Davis Brown, we understand that every lease extension is different, and we have in depth knowledge of the process and technicalities in this specialist area of valuation to obtain positive results.