Extending a Lease: Statutory Route or An Informal Request?
At some point a long lease will need to be extended (unless it has a term of 999 years) because as its term reduces it becomes more difficult to sell a property and a loss of capital value occurs in parallel.
Leaseholders of flats became legally entitled to a statutory lease extension of 90 years added on the unexpired term (after owning the property after two years or more) through s42 of the Leasehold Reform, Housing and Urban Development Act 1993 (notice by a qualifying tenant of claim to exercise right). It was finally granted because a) leaseholders of houses already had the right under the Leasehold Reform Act 1967 and b) leaseholders had been getting increasingly angry for decades that not only had they paid a large amount of money up front, but they continued to pay for repairs, maintenance and buildings insurance and freeholders were making yet more money by charging what they liked for extending the lease.
Over 80 Years Unexpired or Under?
If the lease has over 80 years remaining then taking action before it drops to 80 years remaining will avoid the payment of what is known as marriage value which is where the freeholder is compensated for the loss of ground rent.
Leaseholders are understandably not very happy when they find out about this marriage value after they have purchased because had they known about it sooner they could have factored it into their initial offer. In such a case they can (if they wish) hire a new solicitor and raise a formal complaint to the original solicitor who handled the conveyancing. If an agreement on compensation cannot be reached then the Law Society may be able to assist.
Some landlords or their agents will ask for money ‘up front’ for a valuation but this should be viewed with caution. Anecdotal evidence appears to suggest that the purchaser either does not get a copy of the valuation or they find that the terms of the new lease are for a shorter time than the entitlement and with an increased ground rent that would not be in accordance with the legislation.
It must however be remembered that the freeholder is only ever obliged to grant the 90 years where a formal Notice is served and that a lease extension cannot be granted where:
- The majority of the leaseholders have applied to get 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 and the flat is provided as part of the charity’s functions:
- The building in which the flat is located is within a cathedral precinct or it is owned by the National Trust;
- The property is part of the Crown (although they may agree to extend),
- The freeholder wants to demolish or redevelop the property (in which case compensation would need to be paid).
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 with the freeholder 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.
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.
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.