Feb 2015
Author: Lynda Russell
When the term remaining on a lease of a residential property drops below 80 years it not only affects the owner’s ability to sell the property, it also decreases the value of the property and substantially increases the premium payable to the landlord for a lease extension. It is therefore imperative to give serious consideration to applying for a lease extension before the dreaded 80 year mark dawns.
The problem normally comes to light when the property is put on the market and the owner finds themselves in a situation where they are forced to obtain an extension to their lease to facilitate the sale. This can substantially delay the sale process and increase the costs. Many lenders nowadays will not lend against a property which has less than 80 years remaining on the lease as the lease is not considered good security. A lease with a term remaining below 80 years is, therefore, likely to be less valuable and even cash buyers are likely to reflect this in any offer they may make for the property.
Yet obtaining an extension to a lease of a residential property is normally a reasonably straightforward process and, if matters are concluded whilst the lease has more than 80 years remaining, the price paid for the extension (the calculation of which is governed by statute) will be lower as the landlord will not be entitled to share in the increase in the value of the property that arises when a lease is extended. This is known as the 'marriage value'.
There are two options available should you wish to extend your Lease; the informal route or the formal route.
Informal
A lease can be extended by you approaching the landlord or their agents and asking if they would be willing to extend your lease and coming to a voluntary agreement on the new lease terms. The benefits of this route are that it can be less costly and time consuming and there is no restriction to the length of the extension period and the rent that is payable during the term of the extended lease. As a ground rent will generally still be payable, the premium is likely to be lower than a statutory extension. Further additional terms can also be agreed. The landlord is, however, likely to require payment of its legal fees and the cost of obtaining a valuation.
The downsides are that, if you have a mortgage, your lender’s consent will be required to the grant of the lease extension which may have further cost implications, although these administrative fees are generally nominal. There is also no obligation on the landlord to either enter into negotiations or complete the lease extension and, should you wish to sell the property before the lease extension has been completed, any prospective, diligent buyer will expect the lease extension to be completed prior to completing their purchase.
Formal
Alternatively, an application for a new lease can made under the Leasehold Reform, Housing and Urban Development Act 1993 (the Act) provided you have owned the property for at least 2 years before serving the notice. Under the Act you would be entitled to a further 90 years on top of the term remaining on your existing lease at a peppercorn (nil) ground rent for a premium to be agreed. The premium is generally higher than a voluntary extension as the valuation takes into account the fact that the ground rent is a peppercorn. The amount that the landlord can charge by way of premium for the lease extension is set out in statute.
We would normally advise that you instruct a surveyor to calculate the premium that should be payable for the 90 year extension to your lease. Based on this advice, a Section 42 notice would be served on your landlord claiming an extension and stating what you believe the premium payable should be. The landlord then has two months within which to respond with a counter notice either (1) challenging the claim or (2) admitting the claim and accepting the offer (which is unlikely) or (3) admitting the claim but not agreeing the premium (this is the most likely outcome). If the landlord fails to respond within the two month period then you have the right to the lease extension at the premium set out in your notice. The right is enforceable against the landlord through the leasehold tribunal.
If the landlord does respond and admits the claim but not the premium proposed in the notice, your surveyor and the landlord’s surveyor will try and negotiate a premium which, in practice, is likely to be somewhere between the two figures. If an agreement is not reached within six months of service of the landlord’s counter notice then an application must be made to the leasehold tribunal for them to determine the matter. Should you fail to make an application within six months and terms are still in dispute, you will be deemed to have withdrawn your Section 42 notice and the landlord will not have to grant an extension.
You will be responsible for the landlord’s “reasonable” valuation and legal fees, although there would be no need to obtain the consent of your lender as your lender’s consent is deemed to have been given under the provisions of Section 58 of the Act.
The formal route imposes strict time limits on each aspect of the process and there are implications if any time limit is missed. However the process is useful if your landlord is unlikely to agree a lease extension by negotiation or to drag their heels. In addition, the right to the extended lease can be passed on to any buyer without the need for the lease extension to be completed before they complete their purchase.
It is also important to note that, even if you own a part share in the freehold either personally or by way of a share in the landlord company, your lease may still need to be extended if the term remaining on it starts to get near to the 80 year period. The process for extending it is effectively the same but, in practice, is usually dealt with by agreement.
We act for both landlords and tenants in all aspects of lease extensions, collective enfranchisements, Rights to Buy and Rights to Manage.
For further information on lease extensions please contact either Lynda Russell on 01306 502298 or [email protected] or Stephanie Tilley on 01306 502224 or [email protected].
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