Leasehold extensions

A short lease is one where the lease term has less than 85 years unexpired. Many prospective purchasers are simply unaware that a short lease term has a significant impact on the valuation of a flat. It is advisable to obtain a lease extension (see below)  whenever a lease has slipped below 85 years unexpired and certainly before the lease drops below 80 years. The value of a leasehold flat diminishes as the lease gets shorter. 

It is still possible to consider buying a flat with a short lease, but any prospective lender will normally grant a mortgage on the basis that the seller will apply for a new lease and that the benefit of the seller’s notice under Section 42 of The Leasehold Reform, Housing and Urban Development Act 1993 is transferred to the new purchaser at the same time as the leasehold interest in the flat.  However, not all sellers are willing to do this.

Leases can (at a cost) be extended (see Lease Extensions below). However, if you are hoping to buy a property with a relatively short lease (less than 80 years remaining, say), you should take advice on whether you would be able to extend the lease, and how much this would cost. Lenders will normally require leases to extend for at least 40 years beyond the end of the mortgage, as a minimum, because the value of the property will become lower as the remaining period of a lease gets shorter.

• Mortgage Lender – Many lenders will be reluctant to lend on flats with short leases.  In the past the cut off point was usually in the region of 70 years, but since changes in legislation a number of lenders now consider a short lease as being less than 80 years
• Buyer - in this case a buyer might well proceed with the purchase, given that they can raise a mortgage on the flat.  But they must consider what the situation will look like if they propose selling in say 5 years.  Further, when purchasing a flat with a short lease you will have to consider how much it will cost to obtain a new lease and factor this into your calculations when considering how much you should pay for the flat with the existing term of the lease
• Conveyancer – as you will see from the above, the length of the term is something that a conveyancer must be concerned to ensure is adequate.  You will see that as the length of the term decreases, over time, conveyancers will be cautious in advising prospective buyers about the wisdom of proceeding. 
• Lease extensions – the problem of the ‘short lease term’ can be and often is resolved.  Provided certain criteria can be met, it is possible to obtain a ‘lease extension’.  The procedures for dealing with an extension are quite involved, and are not always capable of being completed within the timescale of the usual purchase transaction.  However, it is always worth making an enquiry of the landlord as to whether or not they would be willing to extend the term, and the cost of doing that.  In many cases the cost of that extension can be negotiated with the seller.  This is the ‘market forces’ way of extending a lease.

All too often there is time pressure – for example a buyer who is insisting on a new lease term before they will proceed.  As a rule, we believe that you can expect landlords to exploit that time pressure to their advantage.  The current owner runs a grave risk of paying a figure greatly exceeding the valuation figure referred to above.

In order  to decide if it makes sense to negotiate, we recommend that you consult a surveyor to give you advice on valuation and determine what the  premium might be if you were to apply under the second method, the statutory method.  Unfortunately we are not qualified to give that advice.  Even if the  figure advised by your surveyor is close to or equals the sum offered by the landlord you would have the comfort of having a professional opinion on the  sum you are proposing to pay.  Beware agreeing other ‘new’ terms – for example increased rent – given that under the statute the new lease would not be at a nil rent on the same conditions as the old lease.

The method of extending a lease is contained in the Commonhold and Leasehold Reform Act 2002, and this legislation sets out the procedures which must be followed by a flat tenant to claim this right.  As a qualifying leaseholder you will have the right to claim an extension of your existing lease of an additional 90 years at a peppercorn rent (ie rent free).

If there is no time pressure, we recommend that you should instruct a chartered surveyor to prepare a formal valuation for a new lease under the 2002 Act.  His costs will be in the order of £200-£300 in our experience.  That valuation figure is based on formula and will constitute your offer to the landlord for the new lease.   The landlord has two months to decide if he agrees – if he does not, the matter will be decided by the First - tier Tribunal (Property Chamber).

Briefly, a flat tenant must have:

• Owned the property for a minimum period of 2 years.  You do not need to have lived in the property for this period: and
• Own a “long lease”.  This includes a lease in excess of 21 years when originally granted and also a shared ownership lease where the tenant’s share is 100%

The present unexpired term of the lease is not relevant.

Please note:  The right will not apply if your landlord is a charitable housing trust and the flat is provided as part of the charity’s functions, nor will it apply to a commercial/business tenant.  Some buildings are also excluded from this right, for example, National Trust properties and Crown properties, although the Crown may be willing to comply with the legislation.

Once the qualification requirements have been satisfied a ‘Notice of Claim’ can be served on the freeholder.  You should first seek advice from a qualified Valuer with regard to the likely premium to be paid for the lease extension.  Although the Valuer may not be able to give an exact figure, he/she will be able to give a good indication of the valuation figure and suggest best and worst case figures.  Once the tenant’s initial Notice has been served, it can be assigned with the lease when the flat is sold.  The buyer of the flat can then proceed immediately with the claim without having to meet the 2 year qualifying period.

You should consider how to finance the transaction.  You will not only be responsible for your own professional fees, but also for those of the surveyor and solicitor working for the freeholder.  In the event of your withdrawing from your claim after serving the Notice, you will still be liable for all such professional fees incurred up to that point.  Your finance should therefore cover not only the premium for the lease extension, but also all professional fees.  It is important that certain information is gathered before service of any Notice, since it must be accurate to avoid any mistakes which may render the Notice invalid.  In that case, you would have to wait another 12 months before you would be able to claim again.  This could be an important consequence because it is likely to result in a higher premium being paid for the lease extension.  At any time after receipt of your Notice of Claim, the freeholder is entitled to require payment of a deposit.  This would amount to 10% of the premium you propose in your Notice or £250.00 whichever is the greater.  Once the Notice of Claim has been served, the freeholder has a 2 month period in which to reply with their ‘Counter-Notice’.  In most cases the freeholder will admit the claim, but counter-proposes a higher figure for the premium to be paid for the lease extension.  Negotiations then take place between the parties, usually through their Valuers, to reach agreement on the premium.

Once agreement is reached, the form of extended draft lease will then be negotiated between the solicitors for the parties.  If you have a mortgage secured against the flat, your lender will need to consent and will require a Deed of Substituted Security to be put in place.  In the (unlikely) event that the respective Valuers do not reach agreement on the premium to be paid, or if other terms cannot be agreed between the parties, either party can apply to the First - tier Tribunal (Property Chamber) for a determination of those outstanding terms.  This must be done no earlier than 2 months and no later than 6 months after the date of service of the Counter-Notice by the freeholder.  If an application is made to the First - tier Tribunal (Property Chamber), each party is usually responsible for their own costs in this respect.

Collective enfranchisement: Where a number of leaseholders in the same block of flats collectively seek to purchase the freehold.

The right to manage: Where the leaseholders collectively take over the management of their building through a right to manage (RTM) company without having to prove fault on the part of the landlord.  The RTM company is responsible for ensuring that the leaseholders comply with their obligations to maintain, insure and manage the building.

Residents’ associations: A body of leasehold residents usually organised by a committee of volunteer members to best represent the leaseholders in the building.  The residents’ association should be recognised either with consent of the landlord or after application to the First - tier Tribunal (Property Chamber).