Not all leaseholders want a lease extension of a statutory 90 years even when they are legally entitled to one under the Leasehold Reform Housing and Urban Development Act 1993. Rather they want to negotiate their own lease term with the freehold on an informal basis. There are however considerable dangers when taking this route. Should the negotiations be both difficult and drawn out, this will inevitably lead to increased costs. This is because unlike the statutory route, informal negotiations don’t have any time frames to meet. If the freeholder withdraws at any time, not only will the leaseholder be required to pay the legal costs for work already undertaken, but the only option available to them would be to start again with the statutory route and pay the required fees for extending under the 1993 Act.
Other areas where it may cost the leaseholder more is if they do not seek an independent valuation (which is always recommended and preferably with an expert in this area). Additionally, If ground rents have been maintained or increased, this can also push up the cost. For example, a freeholder agrees to informally extend a lease with 78 years unexpired by 21 years (taking it to 99 years) with an annual ground rent of £250.00 doubling every 25 years. Over a 99-year term this would give a total of £91,750 in ground rent alone!
There is no such ability for the freeholder to do this under the 1993 Act.
VALUATION DATE AND MARRIAGE VALUE
Another financial issue is that of the valuation date if the unexpired term on a lease falls to below 80 years. The statutory process ‘fixes’ the valuation date at the date the notice was served. There is no ‘date fix’ without such a notice and the landlord could increase the premium if this significant point is reached during the negotiations. The reason for this significance is that when the unexpired years on a lease fall to below 82 years then the purchasing of an extension automatically becomes more expensive. This is due to what is termed ‘marriage value’. Lease extensions add value to a property and when ‘married together’ exceed the combined value of them taken separately. Under the 1993 Act, the freeholder landlord is entitled to half of this increased value which can sometimes be a substantial amount. Extending extend a lease with a remaining term of 80 years or more means no marriage fee is payable.
The statutory route also takes into consideration mortgages so the leaseholder doesn’t need consent to extend the lease, something not possible in voluntary extension.
We have been asked if we would informally extend a lease on more than one occasion but the freehold company Directors believe its far better to go ahead under the statutory route where leaseholders can be protected under law. This has been well received when the differences between the informal and statutory route have been explained as the lease extension we have been involved with to date have been under the 1993 Act.
Note: This information was sourced from an article written by Jo Rengger of Russell-Cooke LLP which unfortunately I can no longer find.