Can we extend our lease?

What is a statutory lease extension?

The Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”) allows lessees to extend their lease by 90 years in addition to the unexpired term of their lease at a peppercorn rental.

Why extend a lease?

As the length of the unexpired term of a lease gets shorter, the premium payable to extend the lease increases:

  • If a lease has less than 80 years unexpired then marriage value is payable to the landlord, which could be significant.
  •  A lessee may encounter difficulties if they want to sell their flat if the unexpired term is considered unmortgagable.  Different lenders have different criteria but generally require an unexpired term of at least 70 years.

Another way of obtaining a long lease is to collaborate with other flat owners in the building to exercise the right to collective enfranchisement.  Once the freehold has been acquired an extended lease (usually 999 years) will generally be granted to the participants.

Selling with a short lease can be overcome and this can increase the marketability of the flat (see “How do I sell my flat with a short lease?”).

Qualifying for a statutory lease extension

  • The flat must be held under a long lease i.e. one which was granted for a term of more than 21 years; and
  • The flat must have been owned for more than 2 years. 

Personal Representatives of a deceased lessee can serve a Notice provided that the right is exercised within 2 years of the grant of probate.

There are exceptions and advice should be sought to check that a lessee is eligible to extend their lease. (see “Are any lessee’s excluded from obtaining a lease extension?”)

Who should I instruct?

This is key to extending the lease.  It is essential that the solicitor and valuer engaged have proven expertise in leasehold enfranchisement.  The professionals listed will need to work as part of a team to achieve the common goal of extending the lease on the best possible terms.  Those engaged will comprise:

  • Solicitor
  • Valuer
  • Barrister in complex cases

The role of the valuer

The valuer will inspect the flat and provide the lessee with a valuation report calculation setting out the likely cost of the lease extension.  The valuer should also advise on the premium to be inserted into the Notice, which will be generally 15-20% below the valuation.

The valuer will then negotiate with the competent landlord’s valuer once the counter notice has been served.

The valuer will represent the lessee at the First-tier Tribunal (“FTT”) if a mutually acceptable premium cannot be agreed.

The role of the solicitor

  • check whether the lessee is a qualifying lessee; 
  • draft the Notice and serve it upon the competent landlord (usually the freeholder) and any intermediate landlord;
  • deduce title and pay the statutory deposit to the competent landlord’s solicitor;
  • make access arrangements for the valuer(s) acting for the landlord and any intermediate landlord; 
  • receive the counter notice and send a copy to the appointed valuer;
  • arrange for the valuers to open negotiation;
  •  apply to the FTT not less than two months and not      more than six months from the date that the counter notice is served.  This will protect the Notice and ensure      that it is not deemed withdrawn; and
  • negotiate the terms of the new lease with the      competent landlord’s solicitor and agree the costs that are recoverable      from the lessee on completion of the lease extension.

Marriage Value

This is the potential for increase in the value of the flat arising from the grant of the new lease where the unexpired term is less than 80 years.  The Act requires that this "profit" shall be shared equally between the landlord and lessee. The valuers will rely on local knowledge and experience to assess the increase in value in the flat arising from the new lease.

The premium to be paid for the lease extension

The valuation formulae are complex but are primarily based on compensation for loss of ground rent and the length of the unexpired term. As specified above it is very important to be aware if the lease has less than 80 years left at the date the Notice is served on the competent landlord, the lessee must also pay Marriage Value which will increase the premium.

Serving the Section 42 Notice

If the competent landlord is a company, the Notice must be served at the registered office.  Ensure that a company search is carried out on the day that the Notice is served.

If the competent landlord is an individual, ensure that the solicitor has  a current address which can commonly be found on a ground rent demand.

An up to date search of all superior titles should be obtained on the day that the Notice is served. 

The Notice should preferably be served by hand and a proof of delivery requested so that the service of the Notice can not be disputed.

Never rely on the address on the office copy entries.

Are any lessees excluded from obtaining a lease extension?

A lessee will not be able to exercise the right for a new lease if:

  • the lease is a business lease;
  • the landlord is a charitable housing trust and the flat is provided by the charity as part of its charitable work;
  • the building is within a precinct boundary of a cathedral; and
  • the building is built on land held by the National Trust, or, the building is owned by the Crown, except where the competent landlord is not the Crown.

How is the process started?

The first stage is to take valuation advice on the premium payable for the lease extension.  It is strongly recommended that a lessee does not proceed without obtaining a valuation from a valuer with specialist knowledge.

The process is initiated by the lessee serving a Section 42 Notice (“the Notice”) upon the landlord(s).  This should be prepared by a specialist leasehold enfranchisement solicitor.

Who is the competent landlord?

The competent landlord is the landlord with a superior interest in the flat who is able to grant a 90 year lease extension, i.e. an interest more than 90 years longer than the present lease.

In most cases the competent landlord will be the freeholder and it will therefore be a simple task to ascertain who to serve a Notice upon to initiate the statutory process.  However, it is common for there to be intermediate landlord(s) as well as a freeholder to be served. 

The Notice

There is no standard form but many legal stationers have precedent documents that are used.  It is essential that all details are completed fully and correctly.  Spellings should be checked.  Misdescriptions or inaccuracies should be avoided as this may invalidate the Notice.

If the competent landlord is not the immediate landlord, the Notice must be served on the competent landlord and any other landlords.  The Notice should specify who is being served a copy of the Notice.  Management companies and guarantors who are parties of the management lease must also be served with a copy of the Notice.

The Notice triggers the statutory procedure for acquiring the new lease and the lessee will be liable for the competent landlord’s reasonable and recoverable costs as from the date the Notice is served.

The Notice should specify a response date which is not less than two months from the date that the Notice was served.  Allow a few more days than the two month period for responding.

The registered proprietors of the flat must sign the Notice.  It cannot be signed under a Power of Attorney.  If the lessee is a company, that company must execute the Notice in accordance with its Memorandum and Articles of Association.

The Unilateral Notice

The lessee’s solicitor should lodge a Unilateral Notice at the Land Registry against the freehold and any intermediate leasehold titles.  The fee payable is currently £50.00.

If the interest is unregistered, a Class C(iv) Land Charge should be lodged.

In either case, this provides protections for the lessee against the landlord’s sale of the freehold since any purchaser of the freehold, subsequent to the registration of the Notice, will take the freehold subject to the application for the new lease.  The lease extension will be able to continue as if the new owner had originally received the Notice.

After the Notice has been served

The service of the Notice fixes the valuation date as at the date of the Notice.  This is the date when the variables affecting the price are set, such as the unexpired term of the lease, the present value of the flat and its assumed future value.

The competent landlord’s solicitor will acknowledge receipt usually without admitting the validity of the claim at that stage.  Up to date office copy entries of the leasehold title, a coloured copy of the lease and the statutory deposit will be requested, representing 10% of the premium inserted specified in the Notice. 

The solicitor commonly requests access arrangements so that access can be obtained for the purposes of the landlord’s valuation.

Under the Act, the landlord’s solicitor has a period of 21 days from the date of the service of the Notice to request the above and the solicitor appointed should provide the requested information within 21 days.

Serving the Counternotice

This must be served no later than the response date.  If no counternotice is served, the lessee is entitled to acquire the lease extension on the terms set out in the Notice.

It is advisable for the counternotice to be served by hand.  The counternotice should specify whether the claim is admitted.  Common reasons for the claim to be denied are if there are inaccuracies in the Notice, if the premium offered in the Notice is unreasonably low or where the property has not been owned and registered at the Land Registry for a period of two years.

What if the parties cannot agree on the premium?

The valuer and the competent landlord’s valuer have a period of two months from the service of the counternotice before an application can be made to the FTT.  The mere act of lodging an application can encourage settlement between the parties.

In most instances lease extension claims are resolved by negotiation between the valuers. In those minority of cases agreement cannot be reached the matter can be referred to the First-tier Tribunal (FTT).  The lessee is not liable for the landlord’s costs in respect of any proceedings before the FTT, except where the FTT determines that an application should be dismissed or one party has acted unreasonably, in which case costs limited to £500 may be awarded.

There is no fee payable to the FTT for making an application and it can be made by either party. 

Deemed Withdrawal of the Notice

If an application is not made within six months of the date of the counternotice, the Notice is deemed withdrawn.  This will mean that the lessee must wait twelve months before serving another Notice and liable for the competent landlord’s Section 60 costs. 

This can have serious consequences if the term of the lease falls below 80 years during this time or if the flat has been sold.  The buyer will not be entitled to extend their lease under the 1993 Act until they have owned and been the registered proprietor of the flat for two years.

The new lease

The new lease will be at a peppercorn rent for the whole of the new term of the lease, and is to be on the same terms as the existing lease, subject to minor modifications and certain exclusions and additions:

  • Modifications – to take account of any alterations to the flat, or the building, since the grant of the existing lease or to remedy a defect in the lease such as the absence of an insurance provision;
  •  Exclusions – since the 1993 Act provides a right to perpetual renewal of the lease, any existing clauses relating to renewal, pre-emptions or early termination are to be excluded;
  • Additions – requirement not to grant a sub-lease of sufficient length so as to confer on the sub-lessee a right to a new lease under the 1993 Act.
  •  The new lease may include additional redevelopment rights, exercisable within 12 months before the expiration of the current lease term and within 5 years before the expiration of the extended lease.  This is subject to a court application and the payment of full compensation to the lessee for the full value of the remaining terms of the lease. This will not cause any difficulties in mortgaging the flat.

What is payable on completion of the lease extension?

The lessee will pay their own legal and valuer’s costs and, in complex cases, often those of the Barrister.  

There will be Stamp Duty Land Tax payable if the premium is over £125,000, as well as Land Registry fees and other disbursements such as search fees. The ultimate cost will depend on a number of factors including the complexity of the transaction and how long it takes, and importantly whether or not it is necessary for the matter to be referred to the First-tier Tribunal. 

Section 60 of the 1993 Act sets out those costs that are recoverable from the lessee on completion. 

The lessee is liable to pay the landlord’s reasonable legal and valuation fees.  Legal fees are limited to the costs associated with considering the Notice, requesting deduction of title and the statutory deposit, requesting access details for the purposes of the valuation and dealing with all aspects of the conveyance through to completion.  Only the valuer’s fee for carrying out the valuation is recoverable from the lessee.

Selling a flat with a short lease?

If a lessee is selling a leasehold property and they are willing to serve a notice on the landlord to acquire a lease extension and for the benefit of the notice to be assigned to the buyer upon completion, an experienced firm can assist.  A seller willing to serve a Section 42 Notice will find that this greatly assists saleability.

The seller serves a Notice upon the competent landlord in the usual way, commonly after exchange.  Upon completion, the seller and the buyer execute a Deed of Assignment of the Benefit of the Section 42 Notice which enables the buyer to step into the seller’s shoes upon completion and continue with the lease extension process as if they had owned the flat for 2 years.

Buying a flat with a short lease and extending the lease

Ideally a prospective buyer looking to purchase a leasehold title which has 83 years or more unexpired on its term so that they are in a position should they choose to do so following completion to apply for a lease extension.  Note that they would need to wait for 2 years from the date of registration at the Land Registry should they decide to extend your lease after the purchase of the property.

If a prospective buyer looking to purchase a leasehold property the lease of which has between 80 and 82 years unexpired and certainly if less than 80 years, it is advisable to ascertain whether the seller of the property is in a position to serve a Notice to extend the lease and to assign the benefit of the Notice to the buyer on completion.  This will enable the buyer to assume the seller’s rights to a long lease and pursue the lease extension after completion.  Further, this avoids the need to wait 2 years before being entitled to serve a Notice in their own right when the premium will be inevitably higher. 

Financing the lease extension

It is advisable before committing to the process to know how the lessee will finance the lease extension.  It may be possible to drawdown a further advance from an existing mortgage.  Some costs will be incurred from the outset such as the valuer’s fees, solicitor’s fees for service of the Notice and the statutory deposit which can be requested at any time after it has been served.

In the event of a withdrawal whether the lessee decides that he cannot complete the lease extension process, or if the Notice is invalid, or deemed withdrawn, there will be abortive legal and valuation costs to be paid to the landlord and the lessee’s own solicitor and valuer.

Conclusion

Enfranchisement is a complex field of law which should be undertaken only by specialist leasehold enfranchisement solicitors and specialist valuers.  In short, take proper advice to avoid the many pitfalls. 

 

www.jpclaw.co.uk

Enfranchisement Department

 

Graham Jaffe                                                    Katie Cohen

Partner                                                             Partner

Jaffe Porter Crossick LLP                                  Jaffe Porter Crossick LLP

gjaffe@jpclaw.co.uk                                          kcohen@jpclaw.co.uk

020 7644 7260                                                   020 7644 7261