Case study 1. Lease extension – dangers in DIY negotiation
The client was a leaseholder and was looking for a cheap lease extension.
OUR CLIENT’S PROBLEM
The client didn’t want to spend too much money but wanted a lease extension nonetheless. So she took on the negotiation yourself, ignoring the valuation advice from a specialist lease extension surveyor. On the face of it she got a good deal – the premium she got the landlord to agree to for a voluntary lease extension was indeed pretty cheap. However the landlord wasn’t stupid. As part of the offered deal, there was a significant although gradual increase in the ground rent.
The client had simply not bothered to do the maths. After 50 years, under the deal she negotiated directly with the freeholder, the ground rent would have hit an astronomical £50K per annum. She just hadn’t spotted this and didn’t appreciate its significance.
In reality what she didn’t realise was that she was effectively making her flat unsaleable – no purchaser in their right mind would have taken on a lease under which they would be committed to pay £50K per annum ground rent.
We made crystal clear to our client that as her solicitors whilst, if she wanted to, we would go ahead with enacting lease extension she had personally negotiated, it was not only against our advice, but we advised her in the strongest possible terms not to go ahead with the deal.
The client eventually saw sense and our specialists negotiated for her a fair lease extension – one which had a slightly higher premium to pay, but with a sensible level of ground rent. As a result her flat did not become unsellable – and its value increased nicely on account of a lease extension.
Here at Bonallack and Bishop, our specialist lease extension team are not simply form fillers – rubber stamping any deal that is presented to us. We have an obligation to advise the client, whether or not they actually want to hear that advice – and because our team are more than aware of the wider commercial aspects of lease extension, we were able to save this particular client from a truly disastrous deal.
Case study 2. Lease extension – the obstructive freeholder
The client was a leaseholder and lived in the flat that she owned.
OUR CLIENT’S PROBLEM
Our client has owned her flat for more than two years and was keen to extend her lease as it was becoming short. After discussing the options with her, she decided to proceed on the statutory route as she thought that she may like to keep the flat for the foreseeable future and did not want to have to deal with the hassle of potentially extending her lease again in the future.
At the beginning, this appeared to be a very straightforward matter.
We carried out all of the usual preparatory steps and served an Initial Notice on the freeholder.
The deadline by which the freeholder was to serve a Counter Notice came and went, with no communication from the freeholder. The freeholder then realised its mistake and proceeded to send ‘Without Prejudice’ correspondence proposing a lease extension and threatening to block any statutory lease extension, which of course, it could not do.
We made the necessary application to the County Court in order to obtain a lease extension granted by the Court in absence of a response from the freeholder.
Our client was granted a statutory lease extension for the figure proposed in her Initial Notice and the freeholder lost the opportunity to propose a higher figure in its Counter Notice.
We succeeded in getting a statutory lease extension for the client. It is unclear why the freeholder failed to respond; they may have simply forgotten to reply or may have decided not to respond as they simply didn’t want to grant a lease extension. Either way, the freeholder initially took the view to block any attempt at a statutory lease extension – which it didn’t have to do. The correspondence initially was hostile and obstructive but we managed to guide the client through the process and obtain her leasehold extension in just over six months from the date of the Initial Notice.
Case Study 3 – Lease extension – the very real risks in using solicitors who don’t understand the rules
Our clients were first time buyers and they had found a flat that they wanted to buy.
OUR CLIENT’S PROBLEM
The Flat they had found had just under 82 years remaining on the lease. Whilst they could secure a mortgage over this, they would have needed to have owned the flat for at least two years before they were able to qualify for a statutory lease extension and, by this time, the lease would have dropped down to below 80 years meaning that ‘Marriage Value’ would have been payable as part of the lease extension premium. ie the price payable to the freeholder to extend the lease would be considerably higher
The sellers initially did not want to have to deal with a lease extension at all – and took the stance that the property was sold with its current lease and the buyers could deal with this on completion.
The sellers’ solicitors did not appear to be overly familiar with the concept of lease extensions (either voluntary or statutory) and did not wish to expand the legal transaction beyond standard conveyancing. The sellers eventually agreed to obtain a private lease extension as part of the sale and their solicitors supplied us with a copy of the draft Lease Extension proposed by the Freeholder’s solicitors/agents. The sellers’ solicitors indicated that their clients were happy to accept and complete this.
On checking the document the Lease Extension was wholly unacceptable. The Freeholder had sought to change terms within the lease to make the lease more advantageous to itself. It had also sought to increase the ground rent provisions so that the rise in ground rent over the term of the lease would have meant that by the end of the lease a six-figure ground rent was payable per annum! Remarkably, the sellers’ solicitor had advised their clients to accept this and, had they done so, our clients would have been forced to withdraw from the purchase as the lease would have been so unattractive it would have made the flat unmortgageable and unsaleable in the future – as no future owner would want to be lumbered with ground rent equalling tens, and eventually hundreds, of thousands of pounds.
We explained to the sellers’ solicitors that our clients was not prepared to accept the proposed lease and explained the reasons why.
We instead suggested that, as the private extension route did not seem likely to produce an acceptable lease extension, the sellers’ serve a Statutory Notice on exchange of contracts as the sellers had owned the property for the requisite two years and so they could serve the Notice and assign this to our clients on completion – meaning that our clients could effectively ‘step into the sellers shoes’ and would be treated as if they had owned the property for the necessary two year period.
We drafted the necessary contractual conditions, the Initial Notice and the necessary assignment papers to ensure that the process was managed correctly – as a failure to keep to the strict rules can result in the Initial Notice being deemed withdrawn -and, had this occurred, our clients would have been unable to benefit from the sellers’ ownership and the ‘two-year clock’ would only start running from our clients’ ownership.
Exchange took place, with the sellers serving the Initial Notice and the correct assignment procedure was adopted on completion. The remainder of the procedure should have been simple.
However, the freeholder’s agents/solicitors refused to accept our clients as the new owners or qualifying leaseholders under the statutory provisions (and could offer no justifiable reason for this, or highlight any error in our implementation of the statutory process that may be grounds for rejecting our clients as the new leaseholders entitled to pursue the statutory extension). They continued to correspond only with the sellers’ and their appointed solicitors and took the position that they had agreed a private lease extension with the sellers and so would not participate in the statutory process.
When the draft Lease was eventually provided it sought to make changes to the existing lease terms which are not permissible under the statutory provisions and, despite our rejection of the same, the freeholder continued to insist on these provisions.
We took a robust line with the freeholder and eventually they acknowledged our clients as the leaseholders under the statutory process and abandoned their attempts to get our clients to sign-up to the private lease extension previously offered. They participated in the statutory process so we could progress the matter.
The freeholder also eventually backed down on the changes it was seeking and agreed that it was not entitled to change the lease in this way. We had suggested some amendments ourselves that were permissible under the 1993 Act to modernise the lease and remedy omissions and defects in the existing lease and, after some heavy correspondence on the issue and the threat of an application to the Leasehold Valuation Tribunal, these proposed terms were incorporated into the new Lease.
We often encounter some resistance from freeholders who have sought to offer a private lease extension on terms that would be manifestly disadvantageous to the leaseholder and, when such terms are rejected and the statutory route adopted, the freeholder is as obstructive as possible. It is essential that the statutory processes are followed to the letter as a failure to do so may mean that the Initial Notice is deemed withdrawn meaning that the leaseholder is unable to force a statutory lease extension at the current time and is prevented from doing so for a period of twelve months. Often freeholders are obstructive as they know that under the 1993 Act they have to give the leaseholder a ‘fair deal’ whereas if a lease extension is agreed privately then the freeholder can insist on whatever terms it wishes, regardless of how disadvantageous such terms are for the leaseholder; it is up to the leaseholder whether or not to accept the terms.
As you can see from this real example, it is essential that the statutory procedure is properly followed and if you are buying or selling a flat with a short lease then it is vital that your solicitor can deal with these issues as part of the transaction and does not just limit their role to conveyancing only. A failure to identify key lease extension issues and act accordingly may have significant and disastrous financial consequences for leaseholders.
To sum up – this second case study really shows why lease extension is complex and why you really do need specialist solicitors.
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