Ben’s article was published in Property Today, 19 April 2023, and can be found here.
Extending your lease – a step by step guide
In today’s economic climate, it is understandable that tenants with long leases will be keen to safeguard the value of their flats. If you purchase a leasehold property, you do so for a fixed
period that is stipulated in the lease. When the term ends, the ownership of your property reverts to the landlord.
One way to maintain value is by extending the term of the lease by using the provisions of the Leasehold Reform, Housing and Urban Development Act 1993 (as amended) (“the 1993 Act”). This article will discuss the formal procedure that should be followed when a tenant claims a lease extension.
A qualifying tenant has the right to acquire a new lease for a term 90 years longer than the unexpired term of the existing lease and the existing lease will be replaced. The ground rent will be a “peppercorn” as from the date of completion of the new lease.
In essence, you will be entitled to extend the lease if you have been registered as proprietor of the flat for the last two years (but you do not have to be living in it) and the original term granted by the existing lease was for more than 21 years. However, there are certain exceptions: for example, a lease granted by a charitable housing trust for the purposes of its charitable functions will not qualify.
Broadly, to exercise your right to claim a lease extension, a notice of claim must be served on the landlord. The notice of claim will provide prescribed information including the premium you are proposing to pay. You must allow the landlord at least two months to respond by serving a counter-notice. The landlord is entitled to require payment of a deposit of £250, or 10% of the premium proposed if greater, within 14 days.
If the landlord accepts your right to a lease extension but not the premium offered, there will usually follow a period of negotiation between the parties’ valuers. Not less than two nor more
than six months from the landlord’s counter-notice, either party may apply to the Leasehold Valuation Tribunal for the premium to be determined. It is worth noting that the whole process
could take up to a year.
What will it cost?
The date of service of the notice of claim will be the valuation date for determining the premium payable to the landlord. The calculation of the premium is complex. It is therefore recommended that you should seek advice from a valuer specialising in this field.
Generally, the premium is based on the diminution in the open market value of the landlord’s interest in your flat. The landlord might also be entitled to compensation for loss of value to other property that belongs to him.
Please note that the premium will increase significantly if your lease has less than 80 years to run. This is because the landlord will then be entitled to half of the “marriage value” – essentially the value unlocked by granting the new extended lease. You should therefore act quickly if your lease is close to falling below 80 years.
In addition to your own professional advisors’ fees, you will be responsible for the landlord’s reasonable costs of investigating your claim and the valuation fees and the conveyancing work, these will include the costs from the date when the notice of claim was served.
Non-statutory or informal route to extending your lease
There is a second option available to leaseholders. In this case, the landlord can offer the leaseholder the ability to extend their lease for a lower premium, in some instances for a sum that is substantially less than required via the statutory route.
However, whilst you may be able to save on the fees and negotiate a reduced premium, you may end up with a higher ground rent, therefore it is important to take advice from your lawyer and surveyor to ensure that there is no adverse impact on the marketability of your property.
Leasehold reform – should I wait to extend my lease?
On 20 February 2023, Michael Gove, Secretary of State at the Department for levelling Up, Housing and Communities said:
“We hope, in the forthcoming King’s Speech, to introduce legislation to fundamentally reform the system. Leaseholders, not just in this case but in so many other cases, are held to ransom by freeholders. We need to end this feudal form of tenure and ensure individuals have the right to enjoy their own property fully.”
Considering the planned leasehold reforms, leaseholders may wish to put off extending their lease, but it could still be years before legislation comes into force.