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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:

  1. The majority of the leaseholders have applied to obtain the freehold under collective enfranchisement;
  2. The lease term has already ended;
  3. The property has been sublet on a lease at least 21 years;
  4. The lease was originally granted for less than 21 years;
  5. The freeholder is a charitable housing trust, the National Trust, the Crown (although they may agree), or the property is in a cathedral precinct;
  6. 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:

  1. The full name of the leaseholder and the address of the flat;
  2. Sufficient information about the flat to identify the property and the leaseholder to which the application relates;
  3. Details of the lease including its date of commencement and its terms;
  4. The premium proposed (offer price) for the new lease and or other amounts payable where there are intermediate leases;
  5. The terms that the leaseholder proposes for the new lease if different from the present lease;
  6. The name and address of the leaseholders’ representative if one has been appointed;
  7. Ground rent payable;
  8. 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.

MARRIAGE VALUE

Because lease extensions are not often well explained, not only do some prospective purchasers not realise that they have to have owned the property for two years but that if the lease has less than 80 years left on it then it is going to be more expensive than if it has over 80 years left on it. This is because of what is known as ‘marriage value’ which takes the value of the property before a lease extension from the value it could reach after an extension has been granted. The landlord’s interest (the amount of ground rent lost by granting and extending the lease and for which he has to be compensated) is then added to this figure. This ‘marriage value’ is then split between the leaseholder and the freeholder (as long as the freeholder is the superior landlord). As the cost of a lease extension should always be less than the increase in value that the extension creates, the increase in the value of the property will be more than what has been spent.

This lack of disclosure of marriage value often causes a problem because purchasers often feel that had they been made aware of this then they would have factored it into their initial offer. They may find redress in hiring another solicitor and a formal complaint made to the original solicitors. The Law Society (the independent professional body for solicitors) should be able to assist should no agreement on compensation be reached.

The next part of the process will be that of the landlord’s counter notice which can be read here.

 

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