Author: Andrew Krochmal, Trainee Solicitor, JB Leitch Real Estate
ChatGPT is being discussed everywhere. Could ChatGPT give good advice on lease extensions, and could it even go so far as to make lease extensions interesting!?
A week ago a Trainee Solicitor received an email from an Associate Director at JB Leitch Real Estate, asking them to write an article about Lease Extensions in England and Wales. His schedule was hectic and because with each passing day the deadline loomed closer, he asked ChatGPT -3.5, a large language learning model which scours the realm of the internet, to carry out the task for him.
To see whether ChatGPT could make such a dull subject riveting, the Trainee requested:
“Write 850 words article in a style of William Shakespeare on residential lease extensions in England and Wales. Answer the questions when, why, how and who as part of the article on Residential Lease Extensions in England and Wales”.
The resulting output was as follows:
Act I, Scene I
(Enter CHATGPT, a virtual assistant)
CHATGPT:
To lease or not to lease, that is the question.
Whether ’tis nobler in the mind to suffer
The slings and arrows of outrageous rent,
Or to take arms against a sea of fees,
And by opposing end them? To extend, to renew,
No more; and by a lease extension to say we end
The heartache, and the thousand natural shocks
That tenancy is heir to? ‘Tis a consummation
Devoutly to be wished.
(Exit CHATGPT)
Not bad, thought-provoking, and certainly a twist on the otherwise monotonous texts on the subject.
In our practice, the problem of a short leasehold term usually arises due to the occurrence of multitude of “natural shocks” related to flat living, such as the death of a spouse or parent, the unexpected property damage, birth of a child, divorce, breakdown of long-term relationships, insolvency.
Other mundane causes that bring about the inescapable suffering from “slings and arrows of outrageous rent” are, for example: the end of another a mortgage fixed term deal, an increase of ground rent, fees for removing dangerous cladding and fungus, unintentional trespass to the undemised loft, garage or parking space, dissatisfaction with the building’s manager, and envy of the neighbours who have recently extended their lease term, among others.
Unfortunately, leaseholders often only become aware of the lifespan of their leases when “the life’s thousand natural shocks” force them to find them, dust off the documents and re-read them. Regrettably, ChatGPT has no ability yet to inform the stakeholders whether there are supplemental documents to their leases in existence, like deeds of variations, deeds of rectification, licences or other ancillary documents (But JB Leitch Real Estate Team can help find them. We also advise leaseholders to regularly review their title documents, and of course we can assist them in doing so if needed!).
What AI proclaimed in the Second Act was somehow more dazzling:
Residential Lease Extensions in England and Wales: When, Why, How, and Who.
Act II, Scene I
(Enter CHATGPT, in a scholarly tone)
CHATGPT:
In England and Wales, many residential properties are subject to long leases, typically for a term of 99 years or more. As the lease term runs down, the value of the property decreases, and the leaseholder may face difficulties in selling or remortgaging the property.
How accurate is the above statement? ChatGPT accurately portrays the leasehold predicament as a wasting asset – as term runs down so is the asset value. Which is why, your Trainee shall add, some people avoid living in city centre flats. However, there is still hope for those in this situation – the assistance of a seasoned real estate lawyer versed in the mechanics of lease extensions.
But let’s re-focus on the above AI generated sentence.
What is also striking is ChatGPT’s use of the word “property” instead of “a house” or “a flat” or “a maisonette” which, if you are a lawyer, is not so clever choice.
For a property lawyer dealing with lease extensions a word “property” is unsatisfactory.
Let’s unpack this idea very quickly. Usually, when people live in a leasehold house, they are recommended to approach their landlord and ask to buy a freehold (but not always). When they live in a flat (and flats are always leaseholds), they are deemed to ask for the extension of term.
What follows from this distinction is that these two different situations would be handled by two different Acts – Leasehold Reform Act 1967 for houses and Leasehold Reform, Housing and Urban Development Act 1993 for flats.
Can ChatGPT tell whether your property fulfils the legal definition of a flat? Unfortunately, not yet.
So, when should leaseholders consider extending their lease?
The answer is that it depends on how much time is left on the lease. Under the Leasehold Reform, Housing and Urban Development Act 1993, leaseholders have the right to extend their lease by 90 years and reduce the ground rent to a peppercorn (i.e., zero) if they have owned the property for at least two years. However, the shorter the lease term, the more expensive it is likely to be to extend it. Therefore, it is advisable to start considering a lease extension when there are around 80 years left on the lease.
The above output is quite a conservative guideline. It’s worth noting that the leaseholders extend their lease term when there are 90, 80, 70 or 60 years left on the lease.
In “Hague on Leasehold Enfranchisement” (Seventh Edition, in Introduction at paragraph 1.18), a door wedge book that ChatGPT could not refer to as of yet, the authors suggest that the value of leasehold starts decreasing significantly from when there are 50 to 35 years left meaning that that the initial capital invested in a leasehold becomes locked in a rapidly value depreciating asset. 50 to 35 years is widely regarded as being the last call to extend the term.
Another useful piece of information which ChatGPT omitted is that the extension by 90 years on a lease might not always be possible. If there is, for instance, another intermediary lease between the Landlord and the Tenant, the overall term of the Tenant’s lease cannot be higher than the term in the intermediary lease.
Another important legal aspect that has not been mentioned at all is the Leasehold Reform (Ground Rent) Act 2022. Some flat and maisonettes leaseholders, along with their lawyers, believe that this Act can extend their term and reduce their ground rent to a peppercorn (zero). While the Act offers some benefits, it should be pointed out that the lease extension claim under this Act has already been debunked. Additionally, the desirous reduction of ground rent to peppercorn on grant of a new lease is only partly true. The reduction of ground rent to a nominal fee only becomes apparent after the old lease term has expired, which often could happen long after the flat owner has passed away, or upon the grant of a completely new-born lease on or after 30th June 2022 linked to a freshly built, off-plan estate on or after 30th June 2022 (emphasis added) (S1(2) of Act 2022).
It is worth highlighting for your information that the correct Act for flat living is still Leasehold Reform, Housing and Urban Development Act 1993. While the Leasehold Reform (Ground Rent) Act 2022 does have some bearing on new properties, it doesn’t currently have much influence on old flats.
Why should leaseholders extend their lease?
The answer is that it can be a wise investment. A longer lease term makes the property more attractive to buyers and lenders, which can increase its value. In addition, a lease extension can reduce the ground rent and other fees, such as service charges, which can be a significant cost over time.
The statement that a mere lease extension can reduce other fees, such as service charges for a flat, is an incorrect claim made by some firms on their marketing web sites. The extent to which a lease extension affects other fees depends on various other factors. For example, some people in addition to lease extension instruct their lawyers to link their ground rent to index-based RPI rate or make other important changes to their lease. Such actions are not automatically associated with lease extensions and should be considered on a case-by-case basis.
But how can leaseholders extend their lease?
The process can be complex, but it is generally done through a legal process known as statutory lease extension. The leaseholder must serve a notice on the landlord or the freeholder, stating their intention to extend the lease and offering a premium for the extension. The premium is calculated based on the value of the property, the remaining lease term, and the ground rent, among other factors. The landlord or freeholder can accept the offer, negotiate the premium, or reject the offer and propose their own premium. If the parties cannot agree on the premium, the matter may be referred to a tribunal for determination.
The above cogitation by ChatGPT is on the mark.
However, what ChatGPT will not be capable of doing is filling the documents for the leaseholder. Neither it will find lost documents, negotiate the terms of the actual document with the Landlord, nor register the completed deed with the Land Registry.
Finally, who is involved in the lease extension process? The leaseholder is the person who owns the leasehold interest in the property and wishes to extend the lease. The landlord or freeholder is the person or entity that owns the freehold interest in the property and is entitled to receive the premium for the lease extension. In some cases, the freehold may be owned by a company or a trust, and the leaseholder may have to deal with a managing agent or a nominee of the freeholder. In addition, the leaseholder may wish to engage a solicitor and a valuer to assist them with the process.
Your Trainee agrees with the above statement. With immense trepidation.
Could ChatGPT one day get involved in the lease extension process?
According to the report published by Goldman Sachs on 26 March 2023 entitled “The Potentially Large Effects of Artificial Intelligence on Economic Growth (Briggs/Kodnani)”, the highest exposure to AI automation already have legal and administrative professionals (with former 44% and latter 46%). Therefore, the likelihood that such day will come is high.
Whereas your Trainee might not yet be fully replaceable by AI, he may use ChatGPT or other AI tools , to review lengthy documents, evaluate and retrieve legal information, draft lease reports, analyse regulatory and compliance lease terms, write business email, provide the arguments for and against the case and… help him write an article for Flat Living.
As we have seen above AI does not have all of the answers yet and stakeholders should still instruct a specialist solicitor to act for them on lease extensions.
Finally, does ChatGPT make lease extensions fascinating? Maybe not but lease extensions are an important process for stakeholders in landlord and tenant matters. However, ChatGPT certainly puts an interesting slant on them and bows out with the following:
Act III, Scene I
(Enter CHATGPT, in a lyrical tone)
CHATGPT:
Oh, the woes of the leaseholder,
Whose heart doth ache with every passing year,
As the lease term runneth down,
And the value of their property doth disappear.
But fear not, dear leaseholder,
For there is a remedy at hand,
A lease extension doth await thee,
To restore the value of thy property.
And your Trainee takes exit as well.
Stage left!
(Ends)
About the Author:
Andrew Krochmal, Trainee Solicitor.
Andrew started at JB Leitch as part of the Real Estate team in September 2021 when he received his training contract.
Andrew’s current role involves “disinterring” the complexities and nuances of the freehold and leasehold law.
Andrew has been handling a high volume of commercial leases mostly by conducting due diligence, completing the transactions, submitting the Deeds of Surrender to the Land Registry, and removing the accompanying restrictions. He has also drafted conveyancing transfer documents, giving the leasehold law advice to our landlord clients and, in the main, explored together with his partners almost all facets of a given real estate case.
About JB Leitch Real Estate:
JB Leitch Real Estate Ltd delivers a wide range of due diligence, post-action and stand-alone services. From lease extensions, enfranchisement, assignments, new leases and licences, to handling acquisition, disposal or the right to manage – our clients benefit from comprehensive services all in one place.
Visit: https://www.jbleitch.co.uk/services/real-estate/
