It may initially appear cheaper and quicker to negotiate an ‘arm’s length’, voluntary and informal leasehold extension with your landlord outside the Leasehold Reform Housing and Urban Development Act 1993 (the “Act”) – whilst this may seem, on first glance, easier and cheaper, there are very real potential drawbacks and risks.
Parties ultimately have to make a pragmatic choice on the overall costs, but should always consider the following:
1. The timescale for extending your lease
Freeholders can withdraw on any voluntary or informal leasehold extension at any time, leaving leaseholders with no other option than to re-commence the whole lease extension process on a formal basis using the Act (provided, of course, that they qualify for the right to do so).
Timescales can slip and therefore you cannot force the pace when trying to extend your lease on a voluntary basis – negotiating informally means that you are entirely at the whim of your landlord as to how swiftly the leasehold extension can be wrapped up.
And whilst some freeholders are decent and ethical, sadly, some simply are not.
2. Valuation Date
If a lease’s residual term drops below 80 years, real valuation issues arise. Issuing a formal statutory notice to your landlord of your wish to extend your lease fixes the valuation date at the date the notice was served. If there is no formal statutory notice served on your landlord, there is no “fixing” and the landlord will be entitled to request a greater premium if the lease falls below 80 years during voluntary negotiations [this is because, when leases drop below 80 years, the landlord is entitled to an additional payment – known as the “marriage premium”].
In cases where a lease is approaching the magic 80 year cut off date, it’s unfortunately far from uncommon for landlords to agree to a voluntary leasehold extension only to drag their heels until the lease drops below 80 years – only then to turn their back on any agreed informal price and to then demand the additional “marriage premium”.
3. The terms of your lease extension
When negotiating any voluntary leasehold extension, there are no real limits on what can be include in the terms of the lease. As a result, negotiating and informal lease extension can be tricky – and can even lead to the abandonment of the whole leasehold extension.
When issuing a formal application under the Act, when a statutory notice has the served, negotiations are often quicker and less complex – as the freeholder knows exactly what he has to agree to.
4. The costs of extending your lease on a voluntary basis
Increased legal costs can result from lengthy and complicated negotiations. If a leaseholder has to recommence with a statutory notice, legal costs for work completed in the unsuccessful voluntary process must be paid as well as the dues for an postponement using the Act. Landlords can be left with unrecoverable legal bills if their solicitor has not acquired undertakings from leaseholders’ solicitors to pay costs.
The size of the premium that the freeholder ends up with with may also increase if the leaseholder is tempted to do without specialist independent valuation advice.
What’s more, future lease extension or freehold purchase will be more expensive if ground rents have been maintained or increased. Why? Because the amount of ground rent payable is one of the factors taken into account when coming up with the lease extension premium. So increasing your ground rent also means you’re increasing the cost of any future lease extension.
Leaseholders also have the right to challenge the reasonableness of the landlord’s costs if extending under the Act – something that simply not available with any voluntary lease extension.
The Act does not dictate that the statutory process must take a long time – it merely delivers timescales enforceable in the court or tribunal. Both parties should consider using a notice to protect them if matters do not proceed smoothly, even where the extension is amicable and could otherwise be done outside the Act.
Best to wait for two years ownership before applying for your lease extension?
Leaseholders who have not yet owned their lease for two years should consider the value of waiting and proceeding within the protection of the Act rather than being held to ransom, before rushing into a voluntary extension.
THINKING OF AN INFORMAL OR VOLUNTARY LEASE EXTENSION? CALL US TODAY
Wherever you live in England and Wales, we can help you extend your lease- whether you decide on the voluntary or statutory route. We can manage the process from start to finish, keeping in contact with you regularly using email, telephone – or Skype video if you prefer .
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