The importance of making sure that you get the lease terms right

Mark Chick, Partner at Bishop & Sewell explains why you need to watch out for the detail when extending your lease.

Everyone knows the key reason to think about extending your lease is that the lease itself is a wasting asset and because of a diminishing term needs to be made longer.

There are two ways that this can be done – either under the statute (‘the 1993 Act’) or by voluntary agreement with the landlord.

If you extend under statute there are certain inherent advantages – the term is made 90 years longer and the ground rent is cancelled. Sometimes an agreed deal can be just as good, but you do have to watch out for the detail in the lease terms, particularly in relation to the ground rent.

The lease terms

However, what people do not always realise is that just as extending the lease term itself is very important – it is also crucial that you and your solicitor consider the actual terms of the lease itself.

The renewal of a lease represents a ‘one off’ opportunity to change the lease terms and conditions and also to put right any defects or omissions.

There are some important points to bear in mind and this article takes a look at some of the key things to think about.

What sort of terms can I change?

Under the 1993 Act a ‘statutory’ lease extension there are controls over what can and cannot be changed. Section 57 of the 1993 Act says that a “defect” in the existing lease can be cured – so for instance if the service charge arrangements are defective leading to say a shortfall in recovery for the landlord, then this can usually be fixed. There is also scope for making some other changes.

For instance, changes that are needed because of other changes in legislation that have happened since the lease was granted can also be made.

The good thing with a statutory lease extension is that if agreement cannot be reached on a permitted variation then this can be referred to the First Tier Tribunal for a determination on the issue. However, it is important to realise that you cannot simply ask for any change that you might like as under the 1993 Act only certain types of changes will be permitted and you should therefore take specific advice if you are aware of an issue with the existing lease.

Changes under a voluntary lease extension

With a voluntary lease extension then there are no statutory constraints and it is just up to the parties to agree. This often becomes relevant where a lease has say an absolute restriction on doing something and the tenant wants to vary this. Often the restriction can be ‘bought out’ – and what would technically otherwise be a breach can be permitted on a one off basis. But beware, this usually costs money! Also be aware that there may be limits on how far the landlord can go in making one off changes.

What constraints might there be on the changes?

In a statutory case, the position is that the parties can agree what they like, but outside of agreement on a point then the change has to fit within the justification in section 57.

What does section 57 say?

In essence a change may be permitted if it cures a defect or it would be unreasonable to include the change because of changes that have happened since the commencement of the original lease.

This sounds simple but in practice identifying or arguing over some changes can be time consuming

What about a voluntary extension?

In a voluntary extension in theory the parties can agree whatever terms they like.

However, in practice this can often be a bit one-sided as the landlord does not have to grant the extension at all and it therefore comes down to negotiation.

How far can the landlord go?

It is also important to realise that the landlord’s hands may be tied too. The freeholder has an implied obligation to keep all the leases on similar terms and not to move too far away from the rights granted to each individual leaseholder. There could therefore also be legal grounds for challenge to the landlord from other tenants if he agrees a particular concession to one flat owner that is not available to others.

In particular, a recent case on alterations Duval v 11-13 Randolph Crescent [2018] EWCA Civ 2298 , shows that the landlord cannot always vary an absolute prohibition on doing works if the other leases do not have similar provisions in them.

What sort of defects might there be in my lease?

This is a short article and so we don’t have time to list all of the possible areas of concern here but some particular areas of concern would be:

  • Clauses allowing the landlord to forfeit on the insolvency of the tenant
  • An absolute restriction on assignment
  • Missing obligations – such as landlord’s repairing covenants
  • Typographical errors and omissions leading to defects e.g. a missing schedule or the wrong block being referred to
  • A limited or outdated service charge obligation (for instance where the amount to be paid is an historic fixed amount to be paid on account that might have seemed huge at the time but isn’t now because of inflation).

What about other clauses I might be worried about – like subletting?

In another recent case Jones v Roundlistic EWCA Civ 2284 the court of appeal has shown us the critical importance of getting the lease terms right on renewal.

In this case the flat owner had bought a lease that had been extended under the 1993 Act. The lease contained a provision stating that the property could not be used by anyone other than the tenant and members of his immediate family.

The wording of the clause was as follows: ”not to use the premises hereby demised or permit the same to be used for any purpose whatsoever other than as a single private dwelling house in the occupation of the lessee and his family”.

The tenant wanted to let the property out, the landlord objected and brought proceedings under Section 168 (4) of the Commonhold and Leasehold Reform Act 2002 seeking a declaration that the tenant was in breach of covenant.

The First Tier Tribunal held that the landlord was not entitled to enforce the covenant but the landlord appealed. On appeal, the landlord won. The outcome being therefore that the tenant was not permitted to sublet.

The court also considered a number of other points such as the unfair contracts legislation but decided that these did not apply to leases renewed under the 1993 Act.

Summary

Extending your lease should be seen as a one-off opportunity to review the current lease terms and to make any necessary changes. As the above case shows, if this is not done the property may not be ‘fit for purpose’ and there is very little that can be done about making amendments after the event.

You should therefore make sure that any known issues are considered carefully before embarking on the lease extension process and that the professionals guiding you through the process have the experience and ability to review the current lease terms and comment on points that may not immediately stand out to you as the owner, but which could if not addressed cost you dearly in the longer run.

 

Mark Chick is a Partner and Head of the Landlord and Tenant Department at Bishop & Sewell. Also a Director of ALEP (Association of Leasehold Enfranchisement Professionals) Mark regularly writes and lectures on this subject.

Reviewed: July 2019