Lease Extension
Owners (lessees) of flats have a right to extend their leases for a period of 90 years. Below is a brief explanation:
Lease Extension
WHY?
If you own a flat (and sometimes a house) it is more than likely that what you actually own is a long leasehold interest over the property in question. This lease will normally be granted for a fixed period of time (known as the term), normally 99 or 125 years, although it can be a longer or shorter period. Inevitably, the length of lease remaining shortens over time. This usually slips by relatively unnoticed and only becomes a problem when the flat or house has to be sold or re-mortgaged.
Buyers usually look for as long a lease as possible, but once the remaining term gets below 80 years, potential purchasers may be put off as mortgage companies will usually require the lease to be extended and this becomes significantly more expensive once the 80 year mark has passed. Mortgage lenders all have different criteria but generally, once the remaining term falls to around 60 years or less, it will become virtually impossible to obtain a mortgage on the flat.
HOW?
It is therefore advisable to extend your lease as early as possible to keep costs to a minimum. The legal right for lessees to be able to extend their lease has been addressed in legislation over the years, with the principal elements set out in the Leasehold Reform, Housing & Urban Development Act 1993, as amended by the Commonhold & Leasehold Reform Act 2002. This area of law is extremely complex, partly because of the amount of legislation that has been enacted over the years and numerous subsequent amendments. It is therefore absolutely essential to take suitably qualified legal advice before embarking on extending your lease or dealing with a request from a lessee.
The 1993 Act grants leaseholders the right to extend their lease for a period of 90 years on top of their existing term. Therefore, if your lease has 75 years left unexpired, you are entitled to a new lease for a term of 165 years. The new lease will be at a ‘peppercorn’ ground rent, (i.e. nil), for the entirety of the new term.
The majority of flat owners will qualify for this right; however a solicitor will be able to confirm if you are eligible to apply for a lease extension. In some cases you may not be eligible, the most common reason being that you have not owned the flat for 2 years, although there are other reasons, so it is important to seek legal advice. There are also strict timetables and procedures to follow once the process is initiated and you will need to be guided by your solicitor throughout the process.
HOW MUCH?
The premium payable for the new lease is calculated by reference to three specific components:
- The diminution of the value in the freeholder’s interest in the tenants flat: This is made up of the loss of income to the freeholder from the ground rents for the remainder of the original term, plus the loss due to the additional 90 years to wait for the reversion.
- The freeholder’s share of the marriage value: This is taken as the potential increase in value of the flat over and above the combined value of the landlord and tenants current interests arising from the grant of a new lease. This amount is shared equally between the parties but only applies when the unexpired term of the subject lease is less than 80 years.
- Compensation for loss arising from the grant of the new lease: This is to provide a remedy to the freeholder for any diminution in the value of his interest in other property, i.e. other flats in the building or the building itself and any loss or damage arising from the grant of the new lease.
The premium itself can vary significantly depending on a number of variables. For example, Extending the lease on a flat with a 68 year unexpired lease, a ground rent of £50 p.a., with a current value of £150,000, and an improved (extended lease) value of £165,000 could cost around £8,000. However, the same property, on a lease with only 35 years to run, could cost £55,000! Conversely, if the current lease has 95 years unexpired (and therefore attracts no ‘marriage value’) the cost of an extension may only be around £750.
In addition to the premium it is also important to note that the leaseholder is liable for both parties’ reasonable legal and valuation costs. Usually, the exact premium is agreed by negotiation between the freeholder or lessee, or their valuers. However, if agreement cannot be reached, then an application can be made to the Leasehold Valuation Tribunal (LVT) to make a decision which is legally binding on both parties.
We can advise on the level of premium and liaise with your solicitor on the service of Notices, negotiate with the freeholder/lessee or their valuer and, if necessary, present your case at the LVT. Our experienced valuers are based in London and Sussex and know their areas well. Although it may appear to be an expensive business, remember that, as a lessee, you are adding value to your property, making it more marketable and, in addition, you will no longer have to pay ground rent.
IMPORTANT
From what has been written above, it will be appreciated that specialist legal and valuation advice is imperative. This brief summary is not definitive but intended to give an overview of a complex and ever changing process and professional advice should always be sought if contemplating making a claim.
Contact our Specialists (click on the links below)
For further information, please contact one of our specialist valuers:
Richard Bull - 01273 876207 or 01903 229204 covering our Brighton and Worthing offices,
Mark McFadden - 01323 437903 based in our Eastbourne office
Peter Turner – 01293 441310 based in our Crawley / Gatwick office.