Lease Extension

The Leasehold Reform Housing and Urban Development Act 1993 (‘the Act’) provides a lessee, who has owned a flat for in excess of two years and who holds a lease which was originally granted for a term of over 21 years, a statutory right to extend the length of that lease by an additional 90 years to and to reduce the annual ground rent to a peppercorn (nil value).

The 90 year extension is added to the remaining unexpired term as at the date the s.42 statutory notice is served on the landlord or the date of an informal agreement.

In return for providing this additional 90 year term and losing the remaining ground rent the landlord receives compensation, known as ‘the premium’.

The first steps in making a claim are to obtain a valuation of this premium from a specialist valuer, who will advise not only on the likely price payable but will also provide a figure to open negotiations with.

Full Valuation Report

  • Property inspection
  • Lease analysis
  • Full report with detailed valuation
  • Tailored advice

From £485 + vat

Desk Top Report

  • Cost effective method of attaining a premium calculation
  • Report is prepared on the basis of information provided

From £380 + vat

‘Ballpark’

  • For those putting a ‘toe in the water’ we provide an indication of premium
  • Useful for clients undecided on whether to proceed
  • Provided in short letter form

From £200 + vat

The Premium

The price payable is the accumulation of three calculations:

1.

Capitalisation of the remaining
ground rent

2.

Value of the reversionary interest – ie when the lease expires and the flat reverts to the landlord

3.

Marriage value – the additional value created by merging the lessee and landlord’s interest.

Marriage value is costly however statute dictates that it is only payable where the unexpired term is less than 80 years. If your term is close to 80 years we advise you to start proceedings urgently.

Recent Case Studies

Formal vs Informal Lease Extension?

There are two routes to extending your lease; these being via the statutory process provided by the 1993 Act (known as the ‘formal’ route) or by negotiation with your landlord outside the protection of the 1993 Act (the ‘informal ’route).

The majority of our clients prefer the protection afforded by the statutory route; namely that by serving a section 42 Notice on the landlord the valuation date is fixed, so although the lease term continues to depreciate the actual date of valuation doesn’t change. Secondly, the statutory process provides a strict timetable within which actions, by both parties, must be taken. For example, your landlord must respond to your statutory claim within 2 months.

By contrast, lease extensions completed informally have no set timetable resulting, occasionally, in prolonged negotiations and no fixed valuation date.

We appreciate the uniqueness of each individual client and work closely with you to determine which route suits your requirements and expectations best.

Premium Negotiation

Under the formal route the Landlord serves a s.45 counter notice within two months within which they propose an alternative, usually higher, premium. We open negotiations with their valuer and to and fro until an acceptable premium is reached.

Occasionally, but rarely, agreement cannot be reached, at which point your solicitor applies to the First Tier Tribunal for determination of the premium. Should the case be listed for a hearing we represent you as expert witness.

Why extend my lease?

A lease is effectively a right to use a property for a given period of time. As the lease term falls, the value of the lease decreases and the cost of extending it increases. Obtaining a lease extension will protect and indeed enhance the value of your property immediately.

As buyers become more informed about the impact of lease length on property values it is becoming increasingly difficult to secure sales on flats with shorter lease terms due to the often high and uncertain costs of obtaining an extension. Most mortgage lenders have tightened lending criteria in recent years and borrowers are finding it increasingly difficult to raise funding for flats or re-mortgage flats with shorter lease terms, particularly those under 75 years which are deemed to provide inadequate security.

The cost of extending your lease will depend on numerous factors including the current unexpired term, the ‘long lease’ value, the ground rent payable, and various factors relating to the flat itself and the building within which it stands.

As the lease term falls, the premium payable for extending a lease will become significantly higher. Once the terms falls beneath 80 years the increase can increase substantially each year due to “marriage value”. Marriage value is the additional compensation which is due to the freeholder once the terms falls below 80 years. As a leaseholder it is therefore important to act before the lease term falls below this important threshold or at the earliest opportunity thereafter.

Do I qualify for a lease extension?

To qualify for a statutory extended lease the flat must be held under a long lease and the leaseholder must have owned the flat for not less than two years (note – there is no legal requirement to live in the property for that period).

In return for an appropriate ‘premium’ , payable to the landlord a 90 year extension can be made to the current unexpired term; the ground rent will also be reduced to a ‘Peppercorn’ (NIL) for the entire lease term.

Worked example: Assuming your lease has 60 years unexpired and you are contracted to pay the freeholder a ground rent of £150 per annum, following completion of a statutory lease extension the lease will be extended to 150 years and no ground rent will be payable at all for the entire term. All other lease terms will remain the same however you may wish to take the opportunity to rectify or update terms. If you haven’t owned your leasehold for interest for a minimum of two years you may still be able to extend your lease by seeking a voluntary extension form your freeholder.

How do I extend my lease?

Once we have established eligibility for the lease extension, the first stage is to prepare a professional assessment of the premium payable to the landlord.

We offer either a full valuation and report service or a preliminary report which provides a desktop valuation and advice which will enable the lessee to decide whether to exercise their rights and whether they can afford to do so.

In order to provide this reduced fee desktop valuation, the lessee will need to provide sufficient information upon which an assessment can be made. This will include floor plans with measurements, photographs, estate agents details and a copy of the existing lease.

Should you be undecided on whether to proceed or whether it is viable to do so, a desktop valuation would provide you with the necessary information upon which to make a considered decision.

Alternatively the lessee may instruct us to inspect the property, assess the information provided and prepare a full valuation report. If required we will also undertake negotiations with the landlord or representative to determine whether the premium or price can be agreed.

In order for a full market valuation report to be provided our RICS Registered Valuers will consider the following:

  • The terms of all leases, including intermediate leases, and details of any other tenancies and occupational tenancies;
  • Details of any Deeds of Variation;
  • The ground rents payable, whether they are fixed for the duration of the lease terms or variable and, if so, to what extent;
  • Any Licences to Alter and whether there have been tenants’ improvements, the present value of which falls to be ignored;
  • The planning history;
  • Information on the landlord’s ownership of adjacent property;
  • Whether the property or any neighbouring properties have been recently offered for sale or have been sold;
  • Whether information is available on any claims made or claims settled for any nearby properties

Throughout the process we will liaise closely with either your own solicitor or a specialist solicitor that we can recommend. If required we can also enter into negotiations with the other side’s solicitor in order to reach an amicable decision. On the rare occasion the matter progresses to the First Tier Tribunal (formerly known as the Leasehold Valuation Tribunal) we will prepare a report and represent you at the hearing.

Types of lease extension

Answer: There are principally two forms of lease extension:

  • Statutory lease extension
  • Informal lease extension

A Statutory lease extension is the more formal process of the two and starts with the lessee serving a Section 42 Notice – the Notice of Claim – upon the freeholder under the Leasehold Reform, Housing & Urban Development Act 1993 (the Act). This triggers a chain of events and strict timescales within which both parties must act. Should the parties fail to agree terms, the application can ultimately be referred to the First Tier Tribunal for independent determination.

An informal lease extension is simply a negotiation of new terms between the lessee and freeholder. They are free to agree whatever lease length and ground rent they so wish, usually in return for a reduced premium. Negotiations fall outside the protection of the 1993 Act.

Serving of Notices

Once you decide to proceed with the application to extend your lease your appointed solicitor will issue a Section 42 Notice. This will state the premium we believe should be payable.

Your landlord/freeholder then has two months to serve a counter notice should they so wish.
The counter notice must acknowledge whether you are entitles to a new lease under the Act and,
if not, must specify their reasons. The counter notice will also state which of the proposals in the initial notice are accepted and which contested. The main area of disagreement is usually the premium proposed however occasionally other terms will also be challenged.

The appointed solicitor will serve the required notices based upon the valuation advice provided. The initial notice served on the landlord by a lessees solicitor will be a Section 42 Notice or if you are a freeholder responding to an initial notice, then the solicitor will serve a Section 45 counter notice.

Landlords' requirements

You should be aware that the landlord is entitled, upon serving reasonable notice, to inspect your flat both internally and externally in order to prepare their own valuation. The notice period must be three days as a minimum.

Some landlords also request a deposit, usually 10% of the proposed premium.

Terms of Acquisition

Once the counter notice has been served and upon receiving your written instructions, we will enter into negotiations with the surveyor appointed to represent the other side. Your solicitor will be responsible for agreeing the terms of the new lease.

In the unlikely event that the terms of the new lease are not agreed between parties within two months of the service of the counter notice, either party may apply to the First Tier Tribunal for determination of the terms.

Such an application must be made within six months of the date the counter notice was served. If no application is made within this time and the terms of acquisition still remain outstanding, your notice will be deemed withdrawn and you will be unable to submit a further claim for at least twelve months.

Assuming the terms of the new lease are agreed between parties, you then have four months in which to complete on the new lease. It is therefore vital that you have funds in place and that the new lease is signed by all parties within that time frame. Failure to do so, will result in the claim being deemed as withdrawn.

Costs

In addition to your own valuation and legal costs, you will also be responsible for the landlord’s costs in relation to your claim. Such costs must be reasonable and if they are deemed excessive an application for determination of reasonableness can be made to the Tribunal on your behalf.

Each party is responsible for their own negotiation fees and for any costs incurred either preparing a case or presenting it to the Tribunal.

So how does a lease extension work?

We have produced a helpful flow diagram to guide you through the process.