Residential Lease Extension
You are not entitled to buy the freehold of your property if you own a residential flat – unless you and some your neighbours combine together to purchase the freehold of the entire block – but you have a got the right under the Leasehold Reform, Housing and Urban Development Act 1993 (as amended) to extend the lease on your flat for a further 90 years.
Residential leases and tenancies – what’s the difference?
Those who are considering a lease extension are often confused by the simple fact that not only do the terms tenant, lessee and leaseholder mean exactly the same as far as the law is concerned, they are often used in a different context.
Those dealing with lease extensions have a tendency to use the word tenancy to refer to a short lease [often one originally granted for less than 21 years] and leaseholder when it comes to a longer lease.
Am I eligible make a lease extension application?
Yes, you are if:
a) You own a long residential lease – ie one which was granted originally for twenty one years or more.
b) You have owned your property for at least two years – though in the situation of a property sale, the vendor can serve the notice of claim and then this right can be transferred to the person buying the property. There is no requirement that you have ever actually lived in the property
Can I extend my lease without going through the requirements of Leasehold Reform, Housing and Urban Development Act 1993?
Yes. You can approach your freeholder with a request to extend your lease, but there are some significant dangers in an informal lease extension, including the following:
• The freeholder doesn’t have to agree to your request.
• The freeholder can change his mind about agreeing to your request.
• There is no enforceable timescale and the process could drag on and on (or be completed much more quickly than under the Act).
• The applicant has no rights or statutory protection in the negotiating process, which might mean a landlord will propose an inflated premium and/or changes to the lease terms which are unfavourable to applicant.
How long will my lease extension take?
Normally the process, if undertaken formally using the statutory route under the Leasehold Reform Act 1993, will take between 8 months and a 1 year to complete.
Approximately another six months can be added on should the case have to go before the First-Tier Tribunal – Property Chamber (Residential Property), which was previously known as the Leasehold Valuation Tribunal or LVT.
Thankfully the involvement of a Tribunal is not the norm. If you decide to approach your landlord for an informal lease extension outside of the Act, the process could either be much shorter – or much longer (see above).
How much will extending my lease cost me?
You will have to factor in the following:
• The premium payable for the lease – this will vary depending on the property, the current freehold value, the current level of the ground rent and that due in future and the unexpired years remaining on the lease.
• Fees of your solicitor and surveyor.
• Your freeholder’s ‘reasonable costs’ which include his legal and surveyor’s fees associated with dealing with your notice of claim, serving the counter notice and drafting, when necessary, the new lease. These ‘reasonable costs’ will not however include the cost to your landlord of having his solicitor and surveyor negotiate the premium or appear at the Tribunal.
However, the good news is that the legislation was designed to encourage lease extension and home ownership in general. As a result, in the vast majority of cases using the formal statutory lease extension route, the increase in the value of your property as a direct result of extending your lease will significantly exceed the combined costs you have to pay in doing so
Why long residential leases are a really good thing
The value of a lease reduces as the unexpired term reduces – and so the longer the lease on the property, the more marketable that property will be.
As the remaining years on a lease drop below 70 years and continue reducing, the difficulty in obtaining a mortgage for that property will inversely increase. When there are less than 40 years unexpired years left on the lease it will prove practically impossible to secure a mortgage for the purchase of such a short lease.
The received wisdom is that it is advisable to apply to extend your lease whilst it still has 85-90 plus years remaining and certainly before it reduces to below 80 unexpired years – for when it drops below 80 years remaining the marriage value (an addition to the premium) becomes payable to the freeholder. The fewer years remaining below that eighty year point, the higher the marriage value will be.
Finding out about your property before applying to extend your lease
Residential leaseholders have a legal right under section 41 of the Leasehold Reform Act 1993 to require the freeholder of their property to provide them with details of their interest in the property, which might include information about previously unknown intermediate leases.
The freeholder must also allow the leaseholder to have sight of all documents relating to the property, including surveys and information about services charges.
This could all prove to be useful information for making a decision as to whether to make an application to extend the lease.
Once the section 41 notice is served, the landlord has twenty eight days to respond and cannot add the cost of doing so to any ‘reasonable costs’ payable by the leaseholder to the landlord in any future lease extension application that might be made.
Starting the application process to extend your lease
• initially instruct a solicitor and surveyor who both specialise in residential lease extensions. The application process is complex enough to present many potentially costly pitfalls to applicants who attempt a DIY approach.
• The solicitor will ensure that all the notices are correct and served in time and the surveyor will calculate a realistic level of premium to be paid to the freeholder for the lease extension which will be included in the notice of claim (section 42 notice, Leasehold Reform Act 1993) served on the landlord.
• 10% of this premium has to be paid up front to Landlord as a deposit. Serving this notice marks the formal start of the application process.
• Providing that the application is in order, the freeholder now has no option other than to grant the extension, albeit after negotiation or in rare cases of intractable disagreement, an independently imposed agreement.
What will your solicitor do for you?
Your solicitor will ensure that the procedure for making your residential lease extension, as set out in the Leasehold Reform Act 1993, is followed to the letter. This will include:
• Making sure notices are accurately worded and that their content is correct
• That the premium offer presented in your notice of claim will be considered ‘reasonable’ (failure to ensure this will invalidate the claim)
• Ensure that if no response is received within the time limit to your notice of claim, that you obtain your lease extension by reason of that default.
• That the information requested in the freeholder’s response to your notice of claim is supplied to them in full and on time.
• Lead in negotiations over the terms of the lease and represent the applicant at the Tribunal
• Be there to answer their client’s questions as they arise.
What will your surveyor do for you?
Essentially a surveyor will value the compensation payable to the freeholder for the loss of his interest in the property. The surveyor’s calculations will include:
• Loss of the ground rent over the term of the lease
• The marriage value payable if the original lease has less than 80 years remaining
• Floor area and condition of property
• Factor in any of the pertinent facts revealed in the response to a section 41 notice (see above)
The surveyor will then lead in any negotiations over the premium payable to the landlord and in those rare cases where agreement can’t be reached, provide evidence in the Tribunal
Can a residential long lease be extended more than once?
Yes – and this can happen for various reasons.
You might wonder why a leaseholder wouldn’t simply seek to extend their lease to 90 years in one hit. However, for example, in tough economic times when many are short of cash, it is often cheaper for a short lease extension – which might help in enabling potential purchasers to more easily arrange a mortgage – and it may make the property more attractive to potential buyers.
A short extension may also be preferred if the lease is rapidly approaching the critical 80 year stage. The 80 year point is crucial because the cost of lease extension suddenly rises dramatically [On the basis that as soon as the lease drops below 80 years, the freeholder is allowed to charge an additional sum for any lease extension, which is called “the marriage value”].
Leaseholders may therefore opt for a short lease extension rather than let their lease run down any further because it prevents the marriage value from kicking in.
An annually rent paid by a residential leaseholder to the freeholder. It’s usual for the terms of the lease to allow the ground rent to be reviewed and increased periodically.
When a lease is extended the ground rent is reduced to a nominal amount for the remaining duration of both the original lease and ninety years extension. This is called a peppercorn rent, and the fact that there is effectively no ground rent to pay in future makes a property more saleable.
What happens when the leaseholder and freeholder can’t agree on the value of the lease extension?
If negotiations result in deadlock and no agreement can be reached, the matter will go before the Tribunal who will impose an agreement on the parties.
What sort of disputes commonly arise when you are extending a lease?
More often than not, leasehold extensions are resolved reasonably amicably after both parties go through the negotiation process. Sometimes however, the process can lead to disagreements.
The two most common reasons for disagreement are regarding the amount of money the leaseholder has to pay to extend their lease and about the legal costs of the landlord, which the law says the leaseholder has to pay as part of the deal. Problems can also arise when the freeholder wishes to take back control of his leasehold property because they are considering redeveloping the land, and this can also lead to disputes over the level of compensation due.
With the leasehold extension market growing there has also been a big increase in the number of disputes between freeholders and leaseholders. Figures from the Leasehold Advisory Service support this, showing that the number of people visiting the website went up by 70,000 in 2011-12 to 400,000. Moreover, the number of enquiries received increased by 13%.
How can these residential lease extension disputes be resolved?
If you can’t reach an agreement through negotiating with the input of your solicitor, then you have the right to go to the First-Tier Tribunal. Going to the Tribunal allows an independent third party to intervene and reach a settlement.
How does the First-Tier Tribunal work?
Going to a Tribunal hearing is very different from appearing in court and is usually less formal. There will be a panel of three people hearing the case – a lawyer, a surveyor and an independent layperson. The leaseholder will present their case to the panel, who will listen to what everyone has to say and then reach a decision. Tribunal hearings are usually held at a venue which is convenient for everyone involved.
Do I have to go to the First-Tier Tribunal?
As a leaseholder you cannot be forced to attend the Tribunal, but if you decide not to go, your case may be weakened. If you can’t go, or choose not to go, send an experienced solicitor or barrister to represent your interests instead.
Do I have to have a solicitor with me at a Tribunal?
No, you don’t have to have legal representation. But if there are complex issues to discuss, it’s probably best to have a solicitor present.
How long does the typical Tribunal process take?
Each case is different, but in general terms you can expect to wait around six weeks between the first hearing and getting the final outcome. Occasionally the panel may issue their decision as soon as the hearing is completed.
Do I really need a specialist solicitor for a lease extension?
Extending a lease is in itself a fairly complicated area of property law, and when disputes arise, the complications often get worse. Never consider trying to resolve disputes around extending a lease without the help of a solicitor who has lots of experience in resolving these type of disputes.
Want Specialist Help with your Residential Lease Extension? Contact our experts
If you are looking to extend your residential lease, you are going to need a specialist solicitor on your side. Our team have the experience and expertise you need. So for FREE specialist phone advice:
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