Buying or Selling a short lease?

Leigh Shapiro, Partner at Irwin Mitchell provides us with top tips to remember when buying or selling a short lease.

If you have a short lease, you may feel trapped, unable to sell your property and move up the property ladder as you wish. You may qualify for the statutory claim, but unable to afford the lease extension.

Equally, if you are a buyer, you may be put off buying a property with a short lease if you have to wait two years to qualify for a statutory lease extension.

Leaseholders and buyers should take heart. The Leasehold Reform, Housing and Urban Development Act 1993 contains provisions enabling a buyer to continue a statutory claim initiated by the seller. In doing so, the buyer takes the benefit of the seller's period of ownership. However, this is a complex leasehold conveyancing transaction which requires strong communication amongst all the parties and expert knowledge in the field.

The Process

According to the Leasehold Reform, Housing and Urban Development Act 1993, a leaseholder qualifies to claim a lease extension if they have owned the property for at least two years (other qualification criteria apply). The leaseholder can assign the benefit of the claim to the buyer as part of the conveyancing transaction. Continuing the claim, the buyer will negotiate with the Landlord and complete the lease extension after the completion of the purchase.

The Claim

Serving a notice on the Landlord (known as the Section 42 Notice) begins the statutory claim. The notice must specify a premium which the leaseholder proposes. The leaseholder should engage a qualified surveyor to recommend the premium for the notice.

In a conveyancing transaction, a seller can assign the benefit of the claim. The leaseholder/seller and the buyer should agree the premium for the notice and who is responsible for appointing and paying the surveyor. After completing the sale, the buyer will continue the lease extension claim and may engage the surveyor again in the negotiations with the Landlord.

The notice must be in the leaseholder/seller’s name, as they qualify to make the claim. Who prepares and serves the notice, and pays the costs involved, are down to the negotiation between the seller and the buyer.

Assigning the benefit

The conveyancing transaction requires careful management. The sale contract must contain additional provisions for the service of the notice. The leaseholders/seller will want to wait to serve the notice until the buyer is legally bound to complete the purchase (after the exchange of contracts). An invalid notice will be a concern for the buyer, who may want serve the notice themselves, or may delay the completion of the sale until the Landlord’s has served the counter-notice, accepting the validity of the notice.

It is paramount that the assignment of the notice and the sale of the property occur simultaneously. The Transfer Deed should include a provision to this effect. Following completion of the sale, the buyer should serve a notice on the Landlord to confirm the assignment of the claim.

The Risks

Assigning the benefit of the claim to the buyer is a complex transaction with various risks involved for the seller and the buyer.

If the buyer fails to complete the sale (after the service of the Section 42 notice), the seller will have to choose to either complete the lease extension themselves (paying the costs and premium involved) or withdraw the notice of claim. If the latter, they will be unable to issue a fresh claim for twelve months which may prejudice a future sale. To mitigate this risk, a seller could hold off serving the notice until after the exchange of contracts.

Lease extensions operate within a strict time limit and missing a deadline may result in a claim being ‘deemed withdrawn’. In turn, this may bar the leaseholder from making a fresh application for twelve months. Worse still, the recent buyer would lose the benefit of the seller’s qualification and must wait to qualify themselves or pursue a lease extension by way of an informal agreement with the Landlord. However, the Landlord’s knowledge of the leaseholder’s position is likely to prejudice any informal negotiations.

The buyer is taking the benefit of the claim, but the proposed premium is subject to negotiations. Beginning with the Landlord's Counter-Notice, negotiations will be on-going and may require an application to the First Tier Tribunal (Property Chamber) to settle outstanding terms. The buyer will only know the exact price they will have to pay in respect of the premium and costs once these have been agreed or determined by the Tribunal.

Furthermore, the Landlord may try to get the buyer to agree to terms outside the statutory claim. A buyer should be cautious in accepting this and make sure any deal is done and the new lease completed before withdrawing any statutory claims to avoid the same consequences as detailed above. When agreeing to proceed outside of the statutory basis any deal should be considered against that available under the statute to ensure that a good deal is being achieved. In particular, leaseholders should consider the level of any ground rent that they may be required to continue paying in return for a reduced premium.

If the conveyancing procedure identifies a problem with the lease, the Landlord may agree amendments during the lease extension. However, only in limited circumstances is the Landlord obliged to do so. It may be beneficial to check other extended lease within the block to assess what the Landlord is willing to change.

Establishing the buyer's method of funding the purchase is also important. Does the buyer require a mortgage? If so, the mortgage lender must know about the proposed lease extension and the assignment of the benefit of the claim. They may decline to lend, retain some of the loan amount or attach additional terms to the mortgage offer. This may affect the buyer’s ability to proceed with the purchase.

Getting the right advice

Whether you are qualifying leaseholder selling a short lease or a buyer obtaining the benefit of the notice, it is essential that you receive the best advice. You require a surveyor experienced with lease extension valuations and a solicitor with extensive knowledge and experience of lease extension and the conveyancing process.

Lease extensions can seem daunting, especially when this involves a conveyancing transaction, but with sound advice and good communication with all the parties, a short leasehold property can still be sold and is not necessarily the trap, many fear it could be.

Leigh Shapiro is Partner: Leasehold Enfranchisement Team at Irwin Mitchell who are members of ALEP, the Association for Leasehold Enfranchisement Professionals.

ALEP represents trusted and vetted practitioners experienced in the residential leasehold sector who will provide you with all the services you need to tackle any leasehold enfranchisement issues.

Reviewed: July 2019