Lease Extensions – Top 10 Facts for individual flat owners.
Manchester, London, UK Wide, Residential Property.
You may have seen the horror stories in the news about leasehold owners being unable to sell or re-mortgage their apartments or houses because of a short lease term or onerous ground rent terms. This is a growing issue throughout the country and, if you find yourself stuck in a similar dilemma, you’re bound to feel that the whole issue is incredibly unfair.
Monarch Solicitors share your feelings of frustration, and that’s exactly why our dedicated team of experts are on hand to help you. It’s fair to say that you’re well within your rights to feel aggrieved after struggling to purchase your apartment in the first place, but also having to deal with the additional and sometimes extortionate costs of service charges, ground rents and premiums to extend your lease.
But what is the best course of legal action for you? Every leasehold title is different and lease extensions can be complicated, so you should seek a qualified solicitor’s assistance to help you avoid the traps and pitfalls.
Monarch Solicitors have put together the following brief guide on the basics of extending your lease:-
1. Leasehold Land
Whether you own a house or a flat, owning a leasehold property title 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.
If you own a flat, you will also have to pay a service charge for the repair and maintenance of the common areas of the building including the building structure to the freeholder.
If you are a flat owner and are collectively looking to purchase the freehold, please read our separate guide on collective enfranchisement here.
If you are a house owner, it is generally more cost efficient to purchase your freehold than to extend your lease – please see our separate guide on freehold purchases here.
2. Lease Term & Ground Rents
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.
3. How to Extend Your Lease
There are 2 ways to extend your lease:
A. 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.
B. 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.
4. 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.
5. 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 arrange 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. If a dispute arises on the value of the premium this can be arbitrated by the Property Tribunal and our recommended valuers can also act as experts in a Tribunal hearing.
6. 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. This is why we would recommend that before serving the notice, a freehold valuation is carried out. 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.
7. 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.
8. 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.
The purchaser will need to ensure that the right is protected at Land Registry with a notice on both the leasehold and freehold property titles.
9. 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. Don’t wait to the 11th hour.
10. Obtain Expert Insight & Compensation
Many organisations profess to be experts in this complex are of law, however legal advice should be sought from a qualified firm of solicitors who are authorised and regulated by the Solicitors Regulation Authority. We are also accredited with the Law Society’s Conveyancing Quality Scheme.
At Monarch Solicitors, we understand that every case is different, and we have in depth knowledge of the variations and technicalities in this specialist area of law to gain speedy and positive results.
It is estimated that over 70% of leaseholder, used developer recommended solicitors for their conveyancing and qualify for the Help to Buy Scheme. We can also assist you in recovering damages from your conveyancing solicitors, if they did not make you aware the implications of a short lease term and/or onerous ground rent terms and especially that they would affect the resale value of the property.
We are the best solicitors in Manchester and London, so please get in touch if you require legal advice with leasehold enfranchisement.
Article written by Shazda Ahmed, Managing Partner at Monarch Solicitors.
For more information see our guides on:
– Freehold Purchases (Houses)
– Collective Enfranchisement (Flats)
– Professional Negligence – Leasehold Property
– Right to Manage & Appointment of Manager
– Service Charge & Breach of Covenant Disputes
– Freeholders, Landlords and Management Companies
Or, contact our Manchester Solicitors on 0161 820 8888 or London Solicitors on 0207 592 0806 for a free no obligation half hour consultation.
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