Mark Chick: When Long Leases ‘Run Out’
Mark Chick is a property expert, specialist leasehold solicitor and a Partner at Bishop & Sewell LLP. He is also a Director of the Association of Leasehold Enfranchisement Practitioners (ALEP). Here, Mark has written a follow-on article to some background content that he provided to the Guardian on the 8th May 2014, explaining what happens next where a flat originally held on a long lease (99 or 125 years) is running down to the point where it will ‘expire’ – i.e. simply run out.
If both the flat owner and the freeholder do nothing further and the lease simply ‘runs out,’ then the tenant will not have to vacate as the lease will become what is known as an ‘assured tenancy.’
This type of tenancy is different from the ‘standard’ domestic rental agreement (the assured periodic tenancy, or ‘AST’) as it has far greater security of occupation for the tenant. The rent is effectively subject to statutory control as the parties will have to apply to a rent assessment committee to have this set if it cannot be agreed.
However, the freeholder can serve notice prior to the end of the former long lease bringing the tenancy to an end. This has to be done not more than a year before and not less than six months before the date on which the long lease will come to an end.
If the freeholder does this then it is also likely that they will also propose the rent for the new assured tenancy. If they do, then the flat owner must respond within two months if they want to challenge the proposed rent, otherwise it will be binding.
Also, being served with this kind of notice and wanting to make a claim to extend the lease (or buy the freehold) requires prompt actions as any lease extension claim must be made within 2 months of receiving the notice, or 4 months for a claim to the freehold. Otherwise the right to do either will be lost.
It is therefore vitally important not to ignore any notices served by the freeholder during this time and to get proper advice in relation to them.
This is also an important consideration if there is any prospect of a sale during this time. I often get enquiries that arise because a property with a very short lease is being marketed, or because the owners or heirs to the owner are thinking of selling and not sure how best to approach the situation.
If there is discussion of a sale at this time, then (because of the rights of the freeholder mentioned above) any decision to initiate a lease extension should be taken before getting to the last year of the lease term.
Any purchaser will of course want this done and it should be borne in mind that any new owner would have to wait two years until being able to qualify to extend the lease themselves. For this reason, if thinking of selling a property with a very short lease, marketing it prior to the last two years or so of the term may be a good idea.
Anyone looking to buy in this situation will of course need expert valuation advice and will need to consider how long they will need to invest in the property for to ensure that the process will provide longer-term value. This is because as there is almost no marriage value in a calculation at this lease length. For further details on this specialist valuation advice should be obtained.
Normally in a missing landlord situation the tenant will probably have taken steps to extend the lease using the missing landlord procedure prior to this point.
If not, then the statutory tenancy will arise and Iexpect that the flat owner would have to apply to the FTT (rent assessment panel) to have the rent set.
Having said that, if the freeholder is absent there would be no-one to receive the rent and so potentially the FTT could direct it be paid into court – as per the missing landlord procedure.
Alternatively, the tenant could simply do nothing until the landlord demands rent – relying on the fact that demands more than 6 years old are likely to be ineffective for reasons of limitation.
However, given the possible value to be created if the tenant does not want to renew I anticipate that in practice such an occurrence is very unlikely as if there are other long leasehold flat owners with continuing terms (and the building qualifies) I also anticipate that they would make a claim to the freehold using the missing landlord procedure to attempt to realise some of this value.
One final point to consider is the issue of ‘dilapidations’ – rarely considered in the case of residential property held on a long lease. Just as might be the case with a shorter lease, if the lease runs out the landlord is entitled to damages for any lack of repair in the property when it is handed back. If the lease is renewed then this issue will be avoided.
Therefore, if deciding to hand the property back to the landlord it would be worth factoring this in to any discussions/ negotiations and on the surrender of the lease/ handover of the property.