Extending a Lease During Conveyancing
Many prospective purchasers want to know if they can extend a short lease during the conveyancing process. The answer is ‘yes’ if the seller has owned the property for two years. The process is started the same way as a statutory request (automatic 90 years added) by serving a Notice under s42 of the Leasehold Reform, Housing and Urban Development Act 1993. This will assign the benefit of the notice to the purchaser who will then not have to wait for two years to extend it himself. There is no prescribed form for the assignment but it needs to be clear that the purpose of the notice is to assign the benefit of the s42 Notice. This has to be done before, or at the same time as the lease is legally assigned.
The notice itself should be served between exchange of contracts and completion because if the buyer withdraws before exchange, the seller may have to a) complete the process himself and b) pay all the costs.
The process is as follows:
- After agreeing with the freeholder on the price to be paid, the amount is inserted into a Deed of Assignment of the Benefit of the Notice which is then served on the freeholder. Note that this figure is for the lease extension only, and not the sale price minus the extension cost. It is also highly advisable for this figure to be determined by a qualified surveyor, for which the buyer should be prepared to pay.
- Whilst the conveyancing solicitors acting for both parties should agree the form, the rules for completion and service of these notices are very strict. If they are not adhered to then the notice will be declared invalid, involving the buyer in litigation about the validity of the claim. If the claim turns out to be invalid then the buyer will have no choice but to wait until he is legally entitled to serve notice himself (i.e. he will have had to have owned the property for two years or more).
- Once the seller has the cash from the sale, they pay the cost of that extension to the freeholder
- On completion the sellers rights stated in the Notice served on the freeholder will be properly assigned to the new owner at the same time as the assignment of the lease itself, i.e. when the buyer takes actual ownership. Note that if technical legal reasons prevent this then the claim will be deemed to be withdrawn.
It is important to be aware that the lease will not be extended at completion if it is carried out under statute as there are specific time-frames to adhere to for each part of the process.
The school of thought is that it is always preferable for sellers to have obtained a lease extension before they sell, thereby allowing them to ask a higher price for the property. On the other hand they might not want to do this because the time taken to secure the benefit of a lease extension may add several months to the conveyancing process. Not only that but the buyer will not know what he is going to pay until the price is agreed with the freeholder. Some freeholders take so long to agree terms that the situation ends up having to be referred to the First Tier Tribunal for a determination.
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.