Is a Voluntary Lease Extension – Outside the Act – the Right Way Forward for Me?
It may initially appear cheaper and quicker to negotiate an ‘arm’s length’, informal or Voluntary lease extension with your landlord outside the “Act” (the Leasehold Reform Housing and Urban Development Act 1993) – whilst this may seem, on first glance, easier and cheaper, there are very real potential drawbacks and risks.
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As a leaseholder, in the end, you have to make a practical choice on whether to rely on an informal voluntary lease extension or to choose the formal (statutory) route. And one of the factors you will consider is inevitably overall legal costs – but before you make any final decision, you should always consider the following:
1. The timescale for extending your lease
Freeholders can withdraw on any informal or voluntary leasehold extension at any time, leaving leaseholders with no other option than to re-start 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 value”].
Click here to read more about marriage value
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 value” premium.
3. The terms of your lease extension
When negotiating any voluntary leasehold extension outside the Act, there are no real limits on what can be include in the terms of the lease. As a result, negotiating any 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.
Whilst amending or updating the terms of your lease can be useful if you’re a leaseholder, make sure you have specialist legal advice. When it comes to informal valuations, too many people do without a solicitor – relying on their freeholder to play fair.
Unfortunately, in the absence of expert legal advice, you’re entirely at the mercy of your freeholder when it comes to amending your lease. What may look like entirely innocent “modernising” clauses could cost you dear in the future.
One trick played by many freeholders is to update the ground rent review clause in the lease – in exchange for an apparent concession perhaps with a lower premium or a longer lease extension. But that ground rent review update could be catastrophic – with the freeholder building in significant increases in ground rent which build up over the years, either making your lease very expensive to run or alternatively, making your property effectively impossible to sell.
And even if you do agree a fair price for your voluntary lease extension, there is absolutely nothing you can do to stop your freeholder changing the terms of any stage – another reason why the statutory route is safer and less dangerous.
Don’t ever agree to any change in your lease without making entirely sure you understand what it means for you now and in the future – and the best way of doing so is to get a specialist solicitor on your side.
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 restart with a statutory notice, legal costs for work completed in the unsuccessful voluntary process must be paid as well as the legal costs of a new formal application 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.
Voluntary Lease Extensions – are there actually any advantages?
Yes, in some circumstances, an informal lease extension may be the best way to go – but that depends entirely on your freeholder – and in particular how reasonable they are and whether they’re willing to cooperate.
If you do get a helpful freeholder, here are the advantages of going down the voluntary route;
- Speed – you’re not hampered by a statutory timetable – so with swift and cooperative freeholder, the whole thing could be tied up much more quickly
- You can vary the length of the lease extension – the statutory route gives you just one option – 90 more years on your lease. In contrast an informal lease extension means you can agree an extension for whatever period you like with your landlord. This often comes in most useful when your lease is approaching the crucial 80 year stage, or when you are thinking of selling up and know that the relatively short length of the lease is going to mean problems getting a good price. You can agree any length of extension you like – as little as 10 years is not unusual. but these sort of short lease extensions are far from perfect. Apart from all the dangers listed above, you will also find that you will probably end up paying more proportionately for a short lease than the full 90 years, and bear in mind you’re still going to have to pay potentially legal and surveying costs for you and your freeholder. So while it may resolve a problem, a short lease extension may well prove quite an expensive solution.
- You can vary the terms of your lease – if cash is short but you need to extend your lease, then some landlords agree to a lower premium in return for an increase in ground rent. But beware. This could rebound on you – as indicated above, an increasingly higher ground rent in the future could affect the value of your property or even make it virtually impossible to sell on the open market.
What are main differences between the statutory and voluntary lease extension routes?
Can I just approach my landlord for a lease extension? Yes you can.
The question should perhaps be: ‘why would you want to approach your landlord for an informal lease extension?’
The easiest way to answer that and other questions is to compare the advantages and disadvantages of that making an informal lease extension with making an application under the Leasehold Reform Act 1993.
Here is a summary of those differences:
|Questions||Informal lease application||Application under the Leasehold Reform Act 1993|
|Do I have to have owned the property for 2 or more years before I make the application?||No.||Yes. Two years is the minimum period you must have owned (but not necessarily lived in) the property.|
|I am guaranteed a ‘peppercorn rent’ with the extended lease?||No – your landlord/freeholder could insist on a higher ground rent.||Yes. You will obtain a peppercorn ground rent for the combined period covering the remaining duration of the original lease and the extended lease.|
|Is any agreement to extend my leases I make with my landlord binding?||No. Your landlord can initially agree to extend the lease and then change his/her mind.||Yes – once you have served your initial notice on your landlord they become part of the process and must respond in line with the requirements of the Act.|
|Can I expect the premium for the extension to based on current market rates or a recognised formula and be reasonable?||No. There is nothing to stop your landlord/freeholder from asking for a grossly inflated premium for your extension and demanding payment of suspiciously hefty costs. He or she will probably be aware that the calculation of the premium doesn’t have to be guided by the relevant schedule of the Leasehold Reform Act 1993.||Yes. Schedule 13, Part II of the Act states specifically that the premium shall be the total of:
· the diminution in the value of the landlord’s interest in the flat
· the landlord’s share of the marriage value
· Compensation for loss arising from the grant of the new lease.
|Can I challenge my landlord/freeholder about the level of his costs and the leasehold premium if I consider them to be unreasonable?||Yes. However your landlord is under no obligation to reduce the level of his costs and the premium as a result of your challenge. With informal lease applications, negotiations can rapidly sink to the level of ‘take it or leave it’.||Yes and under the Act you have the right to formally challenge the reasonableness of your landlord’s offer and then, if agreement still can’t be reached, to take your case to the First-Tier Property Tribunal an for independent decision on the matter.|
|Can I expect my landlord to grant me the extension within a reasonable timescale?||No. Your landlord is not obliged to tie him/herself to any pre-agreed timescale and has the potential freedom, if he is unfortunately grasping and calculating enough, to delay granting you your lease extension until the remaining duration of the original lease has fallen below eighty years and the marriage value can be factored into the premium (it remains at 0% whilst the lease has eighty or more years to run).||Yes. The Leasehold Reform Act sets out an application timetable binding on both leaseholder and landlord/freeholder. The clock also stops ticking on the valuation of your property on the date on which your initial notice under the Act is served on your landlord.|
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