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Lease Extensions explained
- AuthorSurinder Ruprai
The Leasehold Reform, Housing and Urban Development Act 1993 provides qualifying leaseholders with a statutory framework to extend their lease by an additional 90 years and reduce the ground rent to a peppercorn or to collectively purchase the freehold of a qualifying building should the requisite number of leaseholders participate.
WHAT IS A LEASE EXTENSION?
A lease extension is the process of adding years back onto a lease, and extending the term you have in the property, before it goes back to the ownership of the landlord.
You can do this either by negotiating directly with the landlord, or by serving a Section 42 notice, which we would recommend you discuss with an experienced legal adviser.
WHY MIGHT YOU EXTEND A LEASE?
Extending a lease with less than 80 years can significantly increase the value of your property. If your lease is short, very few mortgage lenders will be prepared to lend against it, so it will be hard to sell or mortgage the property.
As the lease length decreases, the cost of extending the lease increases.
Below 80 years, it attracts marriage value – which means if you extend, the freeholder is entitled to 50% of the value, which the extension adds to the property.
CAN ANYONE APPLY FOR A LEASE EXTENSION?
To be eligible for a formal lease extension, homeowners must;
• Own a long lease (usually at least 21 years from when it was originally granted) and either;
• Have owned the property for a minimum of two years or;
• Be completing an extension process that was started when a former, eligible homeowner served notice.
There are a few exceptions, which include commercial or business leases, and if the property is provided as part of a charitable housing trust.
WHAT DOES A LEASE EXTENSION ENTAIL?
The process begins when the leaseholder serves a formal notice on the freeholder. This notice needs to include a proposed premium (the amount you will pay for the lease extension, so it is important to obtain a lease extension valuation from a suitably qualified and experienced valuer beforehand. A proposed premium that is too low can invalidate the notice, but if it is too high, you may compromise your negotiations.
Once the notice has been served, the freeholder will typically serve a counter-notice that rejects the proposed premium, requesting a higher sum. The two parties then have to agree a settlement figure within a few months, or else the case can be referred to a Tribunal for determination
HOW IS THE PREMIUM CALCULATED?
The premium has two parts; the reduction in the value of the freeholder’s interest and, where the lease is shorter than 80 years, 50% of ‘marriage value’.
The first part comprises compensation for the freeholder’s lost ground rent, and for the deferring their ability to reclaim the property by another 90 years. The second part, ‘marriage value’, is the increase in the combined value of the freeholder’s and leaseholder’s interests arising from the lease extension.
The more time you have left on your lease the less it will cost to extend it, so it is always best to act early. As marriage value can be a significant portion of the premium, it is advisable to submit a lease extension claim well in advance of the 80-year cut off point.
WHY SHOULD YOU APPOINT A LEASE EXTENSION SPECIALIST?
At the start of the process, you will need to appoint a specialist lawyer and a valuer in this field. The procedure is full of complexities that some general property solicitors and valuers are not experienced in. It is therefore very important that you appoint specialists. Being caught within the traps of the legislation could result in an invalid lease extension claim with critical and expensive consequences for you.
Once you have appointed your lease extension lawyer and valuer then you will be able to commence the process.
If you own a leasehold flat, you and the other flat owners in your building may be able to buy the freehold of your homes under a process called collective enfranchisement.
What is collective enfranchisement?
Collective enfranchisement is the process by which flat owners within a building (or part of a building) can collectively purchase the freehold from the landlord.
Enfranchising will allow you to grant, renew and extend leases, set service charges and other fees, and take over the management of the building.
You and the other leaseholders will need to choose a Nominee Purchaser to become the new landlord. Typically, this will be a company set up for the specific purpose of owning the freehold.
The enfranchisement process is complex, so it is important to instruct a specialist lawyer to handle the legal parts of the purchase on your behalf.
AM I ELIGIBLE TO ENFRANCHISE?
To be eligible for collective enfranchisement:
At least 50% of the leaseholders in the building must agree to enfranchise
These leaseholders must all be qualifying tenants
The building must qualify for enfranchisement
To be a qualifying tenant, you should:
Have a lease that was at least 21 years when initially granted
Not own a business or commercial lease
Not own more than two flats in the building
Not have a charitable housing trust for a landlord where the flat is provided as part of the charity’s functions
To be a qualifying building, it must:
At least two thirds of the flats in the building must be owned by qualifying tenants
Have at least 75% of the internal floor space used for residential purposes (other than common areas)
CAN THE LANDLORD REFUSE TO SELL?
If you use the legal process under the Leasehold Reform, Housing and Urban Development Act 1993, the landlord cannot refuse to sell the freehold (provided the qualifying criteria above are met) other than in certain circumstances, including if they intend to demolish and redevelop all or most of the building.
If you are eligible to enfranchise but you cannot come to an agreement with your landlord on the purchase premium, you have the right to apply to the First-Tier Tribunal (Property Chamber) for an independent decision about what is a fair price.
However, if you do not use the formal legal process, the landlord cannot be compelled to sell and you cannot apply to the Tribunal for a decision on the purchase premium.
WHAT HAPPENS AFTER COLLECTIVE ENFRANCHISEMENT?
Upon successfully enfranchising, you and the other flat owners will need to take care of issues such as:
Granting new leases to yourselves
Setting service charges and other fees
Choosing an agent to take over management of the building
Making an agreement about how to resolve any disputes between flat owners
Creating a sinking fund to cover the cost of the building’s maintenance, improvements, and essential work