Lease Extensions

As an alternative to the Section 42 method, you may wish to pre-empt a statutory claim by offering a voluntary lease extension arrangement. The advantage here is that you can offer the leaseholders terms that are different from those they would be entitled to obtain through the statutory process (90 additional years at a peppercorn rent). This is often better for both parties concerned, as this leaves the potential for the Leaseholder to pay a lesser premium for a shorter term, since the leaseholder will often only be concerned with preventing the lease from running under 90 years remaining, in return, you may have ground rents that increase at a higher rate. Such ground rents will help reversionary interest and will be calculated if for example, a claim to buy the freehold occurs, resulting ultimately in a higher financial gain to you.

If the initial notice is itself invalid, it can be rejected. For example, if the leaseholder serving the notice has not owned the property for two years. If the notice is critically defective, then it can be rejected depending on the severity of the omission. If the notice is invalid it does not prevent a new correct notice from being created, in other words, invalidity will usually only delay the process, not stop it entirely. However as the premium price payable is dependent on a particular valuation date (the date a valid notice is served), you can see how such delays could be beneficial, especially for example where marriage value would otherwise not be applicable until the leases’ terms begin to elapse below 80 years.

The premium counter offer valuation and the negotiations with the leaseholder will most often be done by your Surveyor. The amount you can achieve will, therefore, be affected by the skill and experience of the surveyor you use. We can recommend a variety of skilled Surveyors to choose from, should you need it.

If there are no grounds to dispute the claim, then you still will want to make the most out of this process. The legislation provides that the new lease for the extension must contain certain provisions, but it can also correct defects and modernise the lease.

It can be to your benefit to see that such changes are made. These can be of benefit to you, but there is no definitive list of these, but the following are some known examples:

• The terms of the lease can bring registration fees up to modern values (adjusted to reflect inflation).
• It can rectify obvious drafting errors in the original leases.
• If there has been a change of circumstance, or a new law, then the lease can be changed to reflect that change.
• If the lease does not contain the correct service charge proportion (meaning that they do not add up to 100%) then this is one method of correcting the situation.

Variations of the leases is quite a common request, particularly in cases where the freeholder is made up of the leaseholders, and they are having difficulties managing the running of the building due to unsatisfactory clauses within the lease. There are two main ways this can be achieved: First, the freeholder may reach a voluntary agreement with the leaseholders to amend the lease, with the variation then being registered at the Land Registry. Alternatively, a more practical solution may be to apply to the First-tier Tribunal for an order varying the leases. The entitlement to make such an application derived from the Commonhold and Leasehold Reform Act 2002. Essentially, either the change required effects some required managerial function, in which case, even a singular party involved may apply. But for any other changes, at least 90% of the parties involved must consent to the change for such an order to be acquired.

Lease extensions fall into two categories: ‘statutory’ and ‘informal’ (or ‘non-statutory’) types.

The decision as to which option to use will depend heavily on your individual circumstances, but where both options are available, it is advisable for all leaseholders to compare the pros and cons of each before deciding how to proceed.

The most reliable method is that of a statutory lease extension, which (provided you qualify e.g. have owned for 2 years) is commenced by your solicitor serving an offer notice on the Landlord. This type grants you a lease extension of an additional 90 years with a peppercorn ground rent. It can take on average 5-6 months to complete due to the prescribed time scales within the legislation. There is a formula set out in the statute for how the purchase price (‘premium’) is to be calculated, however, due to differences in valuation evidence this in most cases leads to certain amount of negotiation work between the landlord’s surveyor and your own surveyor. If no agreement can be reached, the First-tier Tribunal may decide it. Due to the fact that the rules are prescribed in legislation, this is seen as the most assured way of obtaining a lease extension.

Another way is known as a ‘non-statutory’ lease extension, this is a purely private agreement between you and the Landlord. This has no requirements, and the terms can be whatever is agreed between the parties. Non-statutory arrangements can potentially be preferred, but one would need to proceed with caution. The process is typically faster than the other method and can complete within just a couple of months in theory. It is advisable that a leaseholder considering this approach compare the terms and price that is achievable in the statutory process.

A 90-year extension to the current balance of your lease and your ground rent will reduce to a peppercorn. i.e. you will pay no more ground rent. The other terms should be the same as contained within your current lease, although, there is a limited scope and circumstances to allow for required changes to correct defects, or to modernise the lease.

While there is a number of things to consider, most crucially you must have been the registered owner of a residential long lease for at least two years.

As a lease falls ever shorter, its marketable value also decreases. If it falls below 70 years, most mortgage lenders will not lend. This in effect cuts out a large group of prospective purchasers to your flat. When the lease falls below 80 years, there will be an additional factor payable as part of the ‘premium’ that you have to pay the Landlord in return for the lease extension, called ‘marriage value’. Due to the fact that the price (premium) of a lease extension increases exponentially with expiration of lease years, it is therefore recommended to extend your lease well in advance of this. While the lease is above 90 years, the premium you will expect to pay is relatively cost-effective and, therefore, is often considered the ideal time to extend.

The method of the ‘premium’ calculation is set under the statute and is rather complex. It involves capitalising ground rents, ‘marriage value’ and ‘deferment rates’ and ‘hope value’. There is a government sponsored online calculator that can be used to obtain a rough estimate of your costs. Click here to access this calculator. However, we recommend using an experienced Surveyor to get a more accurate quotation.