As most people are aware, a leaseholder should begin thinking about extending their lease well in advance of the unexpired term of their lease reaching 80 years. But how do you begin this process?
There are two potential options when it comes to lease extensions:
- The statutory route, under the Leasehold Reform, Housing and Urban Development Act 1993 ("the Act"); or
- The voluntary route.
The statutory route
The Act provides the right for most leaseholders of residential property to extend their lease for a further 90 years in addition to the unexpired term of the lease, reducing any ground rent payable to a peppercorn (£0). There are two main conditions which need to be satisfied:
- The lease must be a long lease (i.e. originally granted for a term of 21 or more years).
- The leaseholder must have been the registered owner of the property for no less than 2 years .
If the above conditions are met, a Notice of Claim can be served on the Landlord stating the premium the leaseholder proposes to pay for the extended lease (a surveyor who specialises in valuations under the Act should be instructed to determine this figure), and any variations proposed to the existing lease. The Landlord then has a period of not less than 2 months to respond to the Notice of Claim with its counter-notice.
The parties have 6 months after the date of the landlord's counter-notice for the premium and other terms of the new lease to be agreed. If they have not been agreed within this period, an application to the First Tier Tribunal will be required to determine the disputed terms. If an application is made, the process can become strung out and costly.
Although there is a two-year ownership requirement to make a claim, claims are assignable with the lease so that a buyer can buy the lease and continue with a claim made by the seller rather than having to wait two years before making their own claim.
Under the Act, the leaseholder is liable not only for their own legal and surveyor's fees, but also those of the Landlord (and any intermediate landlord).
The voluntary route
Under this option, as the name suggests, the Landlord is not obliged to grant a new lease. However, if they do agree to so do, the terms of the same are very much subject to negotiation; this includes the length of the term and the premium. For example, the Landlord may agree to extend the lease by under 90 years in return for a lower premium, or they may agree to extending the lease for more than 90 years for a higher premium. In addition, the Landlord may also be willing to grant a lease extension to a leaseholder who has not owned the property for 2 years.
If both parties are driven, this option can be completed relatively quickly.
Summary
A summary of the main differences:
| |
Statutory lease extensions |
Voluntary lease extensions |
| Do I need to own my property for 2 years before I can start the process? |
Yes. |
No. |
| Will the Competent Landlord be obliged to extend my lease? |
Yes, save if the Competent Landlord is a charitable housing trust granting it as part of its charity work or The Crown Estate. |
No. |
| Will I have to cover the Competent Landlord's fees? |
Yes. |
This will be subject to negotiation, but highly likely. |
| How long will my new lease be? |
The unexpired term of the existing lease plus an additional 90 years. |
This will be subject to negotiation. |
| Will my ground rent change as a result of the new lease? |
Yes – ground rent will be reduced to a peppercorn. |
Possibly. Any ground rent payable after the expiry of the term of the original lease will be reduced to a peppercorn. |
Legislative changes
For some time now the Government has been trying to reform leasehold. This includes the process of lease extensions, and particularly the method of valuation. The greatest impact will be on those leases where the lease length has dropped below 80 years remaining when the claim is made. The current method of valuation of these shorter leases includes an additional amount for marriage value. This is the difference between the aggregate of the leasehold and freehold values of a flat before and after extending the lease.
The intention is that payments in respect of marriage value should be abolished. However, we do not know when this will happen. In the meantime, as a lease term diminishes, the cost to extend it increases. The question is, at what point will the increase in premium payable to extend a shorter lease overtake the potential reduction in the premium because of the abolition of marriage value? When it a good time to make a claim? This, for now, remains to be seen.