Guest blog by Matthew Lewis*
How long is your lease? You have checked, haven’t you? Letting it get too low can wipe £1000s off the resale value and, if it’s very short, can make the flat difficult to sell at all. Potential buyers may find it difficult, if not impossible, to mortgage. Luckily, the law in England and Wales gives you the right to extend, providing certain criteria are met.
There are, of course, costs involved and you need to decide if it is worthwhile for you at this stage in your life plans. If you do go ahead, it can be a lengthy process, possibly the best part of a year, but once you get started you need to keep your eye on the ball and follow the procedures carefully. There’s a timetable, which among other things, ensures that freeholders cannot create unnecessary delays to avoid granting extension.
However, if you miss a deadline on your side, your entire procedure may be considered withdrawn, leaving you in a position where you may have to pay costs of the procedure, and wait an entire year to start all over again.
When to extend and what will it cost?
Some are blessed with 999-year leases and extension will not be a concern (although recent news reports suggest that such leases with escalating ground rent clauses might be!). Shorter leases of 99 years are still common and there, even for a brand-new flat, leaseholders can find themselves having to think about lease extension within 15 years.
Generally speaking, as one would expect, the price the freeholder can expect for extending a lease rises as the lease term gets shorter, but there can be quite a big jump as an unexpired terms drops below 80 years. That’s because, at 80 years or less, you will also have to pay 50% of the ‘marriage value’ on top of the lease extension price. Put simply, but valuers would argue it is perhaps more complex than this, marriage value is the amount of extra value a lease extension would add to your property when the freeholder agrees the additional term of years.
The Leasehold Advisory service has a handy ready reckoner to give you a ballpark idea of the premium you are likely to have to pay, but it’s worth noting the potential pitfalls associated with lease extension calculators, and you can read more about some of them here.
At Coles-Miller, we tested a fictional flat with a market value of £385,000 and found that the difference between extending at 79 years (with marriage value) and 82 years would be around £2000 (from £15,000 vs from £13,000). So, if you are getting near the 80-year deadline, you may want to act soon. You will also need to allow for valuation and solicitors’ fees.
Extension should be very straightforward if you jointly own the freehold with other flat owners in the building. Often, the first thing a group of leaseholders do when they acquire the freehold of the building they live in is to grant themselves longer leases. That is, of course, if lease length is a problem. In such circumstances, and generally speaking, their only costs associated with the lease extension are usually the legal fees. These can be very modest, depending on whether or not, and the extent to which, you wish to take the opportunity to modify any other terms of the lease.
Who can extenda lease?
Under the 1993 Leasehold Reform Act, most flat-owners are legally entitled to have 90 years added to their lease at a “peppercorn rent” (this means no ground rent is payable). For example, if the present lease had 70 years left to run the new, extended lease would be for 160 years.
To be legally entitled to extend, you need to have owned the flat for at least two years. You don’t need to have lived there, just owned it. If you’ve left it a bit late and are about to sell your flat, you can start the process, and pass the rights to the purchaser. But if a buyer waits until they’ve completed the purchase, it’ll be another two years before they’ve a right to start the process.
While the procedures and forms involved in taking advantage of the 1993 Act might seem tortuous, the alternative of private negotiation can have its pitfalls and be equally expensive at the end of the day. If you go down the open market/negotiation route, there are no rules and the landlord could refuse to extend your lease or set whatever terms he likes. For example, he may wish to increase the ground rent as one of the terms of extension. You are, of course, free to withdraw at any stage before completion on an open market/negotiation route, but you may be liable for the other party’s costs on top of any cost you may have incurred.
How do you get started?
As I mentioned earlier, there is a strict timetable, so we’d suggest that the first step is to make sure you have all your paperwork in hand before you start: your lease, service charge and ground rent records etc, and have made sure that you will have any funds needed. There may be a deposit to pay early on and you may need to think about a loan or remortgage for the final reckoning. The last thing you’ll want is to fall at the final hurdle because the funds haven’t come through!
The next step is to contact a surveyor and solicitor who specialise in Leasehold Enfranchisement. The surveyor will give you an upper and lower estimate of a fair price for lease extension and advise on the initial offer to make to the freeholder. The solicitor can then get the process moving in earnest by serving a formal notice, including your offer, on the freeholder. The clock is now ticking.
The freeholder can now ask for a deposit of either 10% of the premium quoted in your initial notice or £250, whichever is greater. This will be your first experience of a vital deadline: once the deposit is requested, it must be paid by your solicitor within 14 days, and they will probably look to you for the money.
Following service of your formal notice, the freeholder has no less than two months to respond with a counter offer. The exact date is specified by you in your notice of claim but remember, this must be no less than 2 months. Then there’s a further two months allowed for negotiations. You’ll already know from your original surveyors report how high it is reasonable to go. Of course, you may be lucky and the freeholder accepts your first offer.
If an agreement as to “the terms” cannot be reached, your solicitor will need to make an application to the First-Tier Tribunal (Property Chamber), part of the Court system that deals with these types of applications.
“The terms” are the wording of the lease and the price payable. In circumstances where “the terms” are not agreed, an application must be made within six months of the freeholder’s response to your original notice, or your lease extension claim will be deemed withdrawn; you will still have to pay all of the costs to that point and will be unable to commence a further claim for a lease extension for a year from that point.
Once “the terms” are agreed, you then have four months to complete. Within this timeframe your solicitor will finalise the new lease with the landlord’s solicitor and then have it registered at the Land Registry. As before, if you fail to complete within that timeframe there will be a deemed withdrawal, you will have to pay the costs and will be unable to serve a further notice claiming a lease extension for a year from that point.
You can find lots more detail from the Leasehold Advisory Service HERE.
Note: The Government has pledged to review unfair leasehold practices, prompted by a national campaign focussed on leasehold houses. This is expected to change the way lease extensions are valued and executed for all leasehold property. Until then, the current system remains in place.
*Matthew Lewis is Partner and Head of Residential Leasehold Property at Coles Miller Solicitors LLP, Bournemouth.
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Deacon accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.