Lease Extensions: Statutory 90 Years
Under s42 of the Leasehold Reform Housing and Urban Development Act 1993 leaseholders became legally entitled to a statutory lease extension of 90 years added onto the unexpired term (after owning the property after two years or more). This right was finally granted because leaseholders had been getting increasingly angry for decades that not only had they paid a large amount of money up front, continued to pay for repairs, maintenance and buildings insurance but the freeholders were making yet more money by charging what they liked for granting consents and extending the lease.
So at some point the lease is going to have to be extended in order to a) reverse the loss of capital value to make it far more likely to reach it’s true market value and b) make it more saleable. Only a peppercorn ground rent will end up having to be paid (usually zero) rather than the full ground rent and any alterations to the property can be noted into the new lease when it is drawn up. An extended lease can also secure funding which would not be possible if the lease only had around 60 unexpired years left on it.
The serving of a s42 Notice of Claim on the immediate landlord (i.e. the freeholder who will have the sufficient superior interest in the property to be able to grant it) is the first step of the statutory extension process.
It must however be remembered that the freeholder is only ever obliged to grant the 90 years where a formal Notice is served but that a lease extension cannot be granted where:
- The majority of the leaseholders have applied to obtain the freehold under collective enfranchisement;
- The lease term has already ended;
- The property has been sublet on a lease at least 21 years;
- The lease was originally granted for less than 21 years;
- The freeholder is a charitable housing trust, the National Trust, the Crown (although they may agree), or the property is in a cathedral precinct;
- The freeholder wants to demolish or redevelop the property (in which case compensation would need to be paid).
CONTENTS OF THE NOTICE
The Notice must contain the following:
- The full name of the leaseholder and the address of the flat;
- Sufficient information about the flat to identify the property and the leaseholder to which the application relates;
- Details of the lease including its date of commencement and its terms;
- The premium proposed (offer price) for the new lease and or other amounts payable where there are intermediate leases;
- The terms that the leaseholder proposes for the new lease if different from the present lease;
- The name and address of the leaseholders’ representative if one has been appointed;
- Ground rent payable;
- The deadline by which the landlord must reply which, by law, is within 2 months of the date of the notice.
Whilst it is not a legal requirement to hire a solicitor to serve the required notice on the landlord, it is advisable to do so.
Something else that the leaseholder must do is to ensure that they have their own valuation carried out on the property and which they pay for. Ideally they will use the services of a specialist in the area of enfranchising such as the Association of Leasehold Enfranchisement Specialists (ALEP).
Note: Extending a lease will not deal with such issues as poor management or an absent freeholder.
LANDLORD COUNTER NOTICE
Once the landlord has received the tenant’s notice, he may request additional information, want to inspect the original lease, and in particular, want to inspect the flat for the purpose of carrying out his own valuation which is highly recommended.
These (and any other requests) must be requested within 21 days of the date of the notice.The leaseholder must also in turn respond to any of these requests within 21 days.
The solicitor acting for the freeholder will obtain official copy entries of the leasehold title to the said property and will advise on the content of the notice. He/she will also check that the particulars of the lease are the same as those held by the Land Registry.
One such notice we had came from a family member of the lessee, who’s husband was deceased. The property was held in the name of the joint tenants and where the title automatically passed to the widow. Along with the Initial Notice of Claim came a copy of the death certificate and a copy of the grant of probate, leaving the widow the qualifying tenant for the purpose of serving the statutory notice.
The counter notice is now served by the freeholder on the leaseholder (or the leaseholders appointed representative) on the date specified in the Notice of Claim. It is most likely that the figure in the tenant’s Notice is an ‘opening shot’ (although it must be realistic) with room left for negotiation.
In the counter notice the freeholder must:
- Acknowledge that the leaseholder has the right to a 90-year lease extension and specifying which proposals in the Notice of Claim are accepted, which are not accepted, and in relation to those which are not accepted, the freeholders counter-proposals;
- Acknowledge that the leaseholder has the right to a 90-year lease extension but states a counter offer in respect of the premium payable for a new lease;
- Denies that the leaseholder has a right to a 90-year lease extension (however there are very few grounds for denial).
If the counter-notice containing the higher price is not served on or before the date specified in the Notice of Claim the leaseholder has the right to acquire a new lease on his terms by applying to the County Court and asking for a ‘Vesting Order’ by which the court declares that the landlord must sell the lease extension at the offer price made by the leaseholder.
Following the service of the Counter Notice, the two sets of valuers will negotiate and (hopefully) agree the premium, subject to instructions.
In the meantime the freeholder can also demand a deposit from the leaseholder which is calculated as a percentage of the offer price that is contained in the leaseholders notice. 10% or £250 may be demanded, whichever is the higher figure.
The terms of a statutory lease extension are as follows:
- To be at a peppercorn ground rent for the entirety of the term of the new lease (i.e. the added 90 years plus the present unexpired term). When the landlord does not receive an annual payment in cash, ground rent is an acknowledgement of the existence of the lease.
- To be on the same terms as the existing lease, subject to minor changes and certain statutory exclusions and additions.
(i) Modifications – to take account of any alterations to the flat, or the building, since the grant of the existing leases (e.g. reference to gas lighting or coal stores), or to remedy a defect in the lease.
(ii) Exclusions – since the Act provides a right to perpetual renewal of the lease, any existing clauses relating to renewal, pre-emption or early termination are to be excluded.
(iii) Additions – a requirement not to grant a sublease of sufficient length as to confer on the sublessee on the right to a new lease under the Act.
- The landlord’s redevelopment right – the new lease must also contain a clause giving the landlord the right to repossession of the flat for the purposes of redevelopment. This right does not arise until the end of the term of the existing lease and is subject to a court application and the payment of full compensation to the leaseholder for the full value of the remaining 90 years. The incusing of the landlord’s redevelopment right does not cause any difficulties in mortgaging the flat.
WHEN THE PARTIES CANNOT AGREE
If the parties cannot agree then this phase (month 5) commences when the leaseholder or the landlord files an application with the FTT.
Both parties have this right but it is normally the leaseholder that applies (through their solicitor). By making this application, the leaseholder is asking the FTT to decide on the price at which the landlord must sell the lease extension.
If an application is to be made this must be done no sooner than 2 months and no later than 6 months after the date of the counter notice.
Note: The reason that the law bans an application being made to the FTT sooner than 2 months after the counter notice is to allow enough time for both parties to hold negotiations and reach an agreement on the price.
A large majority of lease extension cases are concluded in this way, after the leaseholder has served notice, and before an FTT hearing is held.
Hearing at the FTT
This phase (month 8) begins when a hearing is held at the FTT. It usually takes 3 to 4 months from the time an application is sent for a hearing to take place, which usually takes a maximum of 1 day. The LVT panel usually comprises 3 members, a lawyer, a surveyor and a layperson, although a panel can also comprise just 2 people.
It is not a legal requirement that the leaseholder be represented by professional advisers although they may choose to have a solicitor and or a surveyor to speak on their behalf. Some leaseholders may also instruct a barrister to be present.
After the FTT has reached its decision it sends its written determination to both parties. The document will contain the price at which the landlord must sell the lease extension. This determination becomes final after 28 days but if the leaseholder finds that price is too high he is not obliged to buy it.
LEASE SURRENDER (old lease) and REGRANT (new lease)
Once the FTT has sent its written determination (month 9) the landlord must give a draft new lease to the leaseholder within 21 days, and within 2 months of the LVT decision, both parties must have entered into a new lease agreement. The landlord will usually instruct a solicitor to prepare a Deed of Variation, or sometimes a Deed of Surrender and Re-Grant but in either case, the new deed will in law work as a surrender of the existing lease and the grant of a new one.
Once the leaseholder is happy with the draft deed and has confirmed this with the landlord’s solicitor, the landlord will prepare an ‘engrossment’ (counterpart) for signing and which the landlord will keep.
If the landlord fails to give the new draft lease or the new final lease within the above time-frame, the leaseholder can apply within the following 2 months to the County court to ask them to order the landlord to meet his obligations to give the new lease.