At some point the lease will need to be extended (unless it has a term of 999 years) but why? There are several answers to this question. As a lease term reduces it becomes more difficult to sell a property. A loss of capital value also occurs in parallel. So an extension will a) reverse the loss of capital value to make the properties far more likely to reach their true market value and b) make them more saleable. Only a peppercorn ground rent will end up having to be paid (usually zero) 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.
Lease extensions are also one of the 4 areas within a lease that is designed to allow a freeholder to make yet more money after the premium has been paid. If the lease term has fallen beneath 82 years unexpired at this point, 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 a lease with a remaining term of 82 years or more means no marriage fee is payable.
If a freeholder is deemed absent (all attempts to find them have been unsucessful) it is still possible for a lease extension to be granted. A court can accept service of a claim to an extended lease providing certain steps have been followed. The claim will then be dealt with by the First Tier Tribunal on behalf of the missing freeholder.They will determine the amount to be paid which will then be paid into court. The court will then grant the extension.
Valuation advice will need to be obtained in order for a report to be submitted to the Tribunal containing a likely price to be paid. As the Tribunal acts on behalf of the missing freeholder, it will examine the report and adjust the premium that is to be paid accordingly.
Lease extensions can also be taken at differing times. Some people prefer to wait until they have owned the property for 2 years or more so they can take the statutory extension route of an automatic 90 years added to the unexpired term.
When An Extension Cannot be Granted
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).
The next step is that of the freehold report and valuation, a breakdown of which can be found here.