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.
STATUTORY 90 YEARS EXTENSION
Lease extensions can 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. This right was finally granted (leaseholders of houses had the right granted to them several decades previously) because leaseholders had been getting increasingly angry that not only had they paid a large amount of money up front, and 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. This route also provides protection under legislation and time frames for each part of the process., unlike that of a voluntary lease extensions.
Notice of Claim
The first part of the statutory process is that of serving 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). The leaseholder will have already obtained their valuation for inclusion in the notice 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).
The Notice will contain the following:
- The full name of the leaseholder and the address of the flat;
- Sufficient information about the flat to name the property and the leaseholder to which the application relates;
- Details of the lease including its date of commencement and its terms;
- The premium proposed (offer price) for the new lease and or other amounts payable where there are intermediate leases;
- The terms that the leaseholder proposes for the new lease if different from the present lease;
- The name and address of the leaseholders’ representative if one has been appointed;
- Ground rent payable;
- The deadline by which the landlord must reply which, by law, is within 2 months of the date of the notice.
Note: 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.
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.