Lease Extensions

Frequently Asked Questions by Landlords
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As an alternative to the leaseholder serving their Landlord a Section 42 notice to commence a legal claim for an extension, you may wish to pre-empt a statutory claim by offering a voluntary lease extension arrangements. Landlords have historically preferred this option as it enabled such arrangements to increase the ground rent payable under the Lease. However, the Ground Rent Act 2022 has prohibited the creation of any extra ground rent liabilities beyond those that currently exist in the leaseholder's lease.  This said, it is still the case that this "informal lease extension" method is a quicker process to grant a lease extension, and many leaseholders, particularly those who are seeking to extend in order to sell their flats still prefer this option providing the terms are agreeable. Generally, since the advent of the Ground Rent Act, such informal lease extensions are less appealing for Landlords, who may now prefer to await receipt of a Section 42 Notice, which will provide the Landlord with security for his legal and valuation costs.

You would need to need to agree Lease Extension terms with the leaseholder first and foremost. Comparison to what you would have to grant within the context of a formal legal claim may be helpful here. It can be said that there are four terms to agree:-

  • The Premium (which is the purchase price that you should receive in exchange for the extension). It is worthwhile for the Landlord to obtain independent valuation advice about what price is fair calculation, using the statutory equation as a benchmark. It is typical that a Landlord will require the Leaseholder to finance this Survey. It is therefore recommended that a Landlord first appoint an appropriate Surveyor and then have the Leaseholder pay their fee upfront, in order to advise the Landlord what terms to offer ; and
  • The Length of the Extension. While legislation require you to grant 90 years in addition to the unexpired period of the lease, but within the context of an informal extension, this is discretionary; and
  • The Ground Rent. This must be a peppercorn (nil) for a statutory lease extension, however, it is somewhat discretionary in an informal case.  The Ground Rent Act 2022 has had an impact here, preventing Landlords from increasing the rent - however, it still remains an option that the Landlord may require the continuation of the current rent up to the expiry date of the current lease length (it must be a peppercorn (nil) during the extended period; and
  • Costs. There will be professional costs incurred in order to grant a lease extension. Both the leaseholder and the Landlord will require separate solicitors to act on their behalf. The Landlord will usually require that the leaseholder commit to financing the Landlord's solicitor's fee, as well as their own Solicitor's fee.

Once those terms are communicated and accepted by the Leaseholder, solicitors can then be engaged to assist each party to prepare and agree form of the new lease, and manage the transactional elements, that lead to the creation of a lease extension.

 

There are two common misconceptions here.

  1. that a freehold share is representative of their flat; and
  2. that owning a share of the freehold renders their lease unnecessary or obsolete.

1. Owning a Freehold share with fellow leaseholders means that you jointly own the entire freehold building and land together with your fellow neighbour's. Owning it bestows a degree of influence on the Landlord's decisions under the terms of all the leases within the estate. While this asset is often transferred along with the sale of a Flat, the Freehold share is in fact a separate asset from the Leasehold Flat.

2. Owning a Freehold does not negate a Leaseholder's responsibilities under the terms of the lease. However the joint Freeholders may decide not to enforce certain rights that they are entitled to under the terms of the lease, for example, they may waive the desire to collect Ground Rent from the Leaseholders.

However the occupational rights (the rights to occupy the flat) is still only a right that the owner of the leaseholder interest possesses. It is this occupational right that represents the most valuable asset, and when sold on the open market will still be subject to the depreciation resulting from an expiring lease length.

Therefore if you own a lease that it running lower than 90 years and you also own a Freehold share, you should approach your fellow freehold owners (or if the Freehold is held by a Company of which you hold a share certificate, the Directors of that company),  and seek their agreement in principle to the granting of a lease extension to you (usually for 999 years). Both the leaseholder and the freeholders will require legal representation (a solicitor) to carry out the extension, typically financed by the Leaseholder seeking the extension.

If you have received a Section 42 Notice (the "initial notice"), then provided it is valid and the leaseholder qualifies, you are legally required to proceed to grant the extension. But if the Notice is itself invalid, it can be rejected. For example, if the leaseholder serving the notice has not owned the property for two years or if the notice is critically defective, then it can be rejected depending on the severity of the omission. If the notice is invalid and rejected it does not prevent a new correct notice from then 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' (a component of the lease extension formula, which is applicable for leases below 80 years in length) would otherwise not be applicable.

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: Either the freeholder reaches a voluntary agreement with those leaseholders to amend the lease, and pay to have it registered at the Land Registry. Alternatively, there is the more practical solution of applying to the First-tier Tribunal to obtain an order for those leases to be changed. The entitlement to make such an application derived from the Commonhold and Leasehold Reform Act 2002. Essentially, either the change require 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.

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