Informal Request to the Freeholder
Not all leaseholders actually want a lease extension of a statutory 90 years even when they are legally entitled to one under legislation, preferring to negotiate their own terms on an informal basis. There are however considerable dangers when taking this route:
1: Difficult and drawn out negotiations will inevitably lead to increased costs because there are no time frames to meet. Timescales may slip and parties cannot drive matters forward in extensions outside the Act. Landlords can withdraw at any time so not only are the leaseholder required to pay the legal costs for work already undertaken, but they would be required to start the process under the statutory route and pay the fees for extending under the 1993 Act. Landlords can also be left with unrecoverable legal bills if their solicitor has not obtained undertakings from leaseholders’ solicitors to pay costs.
2: If ground rents have been maintained or increased, this can also push up the cost. Taking this example, if the 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;
3: There is no ‘date fix’ in a voluntary extension, unlike the statutory route which ‘fixes’ the valuation date at the date the notice is served when the unexpired terms falls below 80 years, automatically making the lease more expensive due to what is termed ‘marriage value. The freeholder could therefore increase the premium if this significant point is reached during negotiations.
4: 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 actual negotiations. The significance of this is that when the unexpired years on a lease fall to below 82 years then the purchasing of an extension automatically becomes more expensive, 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 a lease with a remaining term of 80 years or more means no marriage fee is payable.
5: The Act provides for the treatment of mortgages, meaning that mortgagee’s consent can be avoided but consent from the lender has to be obtained if the extension is sought outside the Act.
Our RMC has been asked in the past 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.
It is also important to note extending a lease will not deal with issues such as poor block management.
Note: Part of this information was sourced from an article written by Jo Rengger of Russell-Cooke LLP which unfortunately I can no longer find.