Lease Extensions – What are your Options
With leases still remaining a hot topic for owners and lenders, alike, it is important to ensure you are aware of the rent levels within your lease and the term of years left to run.
Lenders review their stance on the level of ground rent which is acceptable to them on a regular basis and this changes from lender to lender which means it is reviewed on a case-by-case basis. However, regarding lease term most lenders require a minimum lease term of 85 years. So, whether you are looking to buy, sell or re-mortgage you may find yourself needing a lease extension.
As leasehold houses are less common this article focuses on flats.
There are two ways of seeking a lease extension: –
- Statutory Route
The Leasehold Reform, Housing and Urban Development Act 1993 (as amended by the Housing Act 1996 and the Commonhold and Leasehold Reform Act 2002) (“The Act”) grants leaseholders a statutory right (subject to a premium payable to the landlord) to a lease extension which will grant a leaseholder: –
- A further 90-year term in addition to the term left to run on the existing lease;
- The rent will be reduced a peppercorn (a nil rent) for the entire term; and
- The rest of the terms of the lease will remain the same, however, it is an ideal time to review the current lease and correct any errors or update the lease or its plan if needed.
To proceed down the statutory route you need to meet certain criteria: –
- Have owned the lease for at least 2 years before you can proceed with a claim.
- The lease must be a long lease, generally meaning a lease of over 21 years.
- Be a flat in a building where
- the Crown is not the landlord
- it is not owned by a National Trust; or
- it is not within a building within a cathedral precinct.
Where these criteria are met, we will then seek to establish who your landlord is, so we know the correct person(s) or company on whom to serve the notice.
At this this point, you should then move to instruct a specialist leasehold valuer. They will be experts in assessing leasehold extension premiums and will advise you of a market place premium. You will need an expert in leasehold valuations as they will look at various things when assessing the premium, for example, if your lease currently reserves a rent you will benefit from a nil rent moving forward but your landlord will lose his revenue so the leasehold valuer will look at the value for the extended term and the loss to your landlord in rental.
After receipt of the valuation we will have the necessary information to serve notice on your landlord that you require a lease extension as per points a) – c) above. Your landlord has 2 months to acknowledge or reject your claim by way of a counter-notice.
The statutory route sets out a strict timetable that must be followed by both tenant and landlord and there are many ways the notice can be deemed invalid, for example If we serve a notice on your landlord offering an unreasonable premium, in exchange for the extension, the notice will be deemed invalid, so it is important to ensure that the notice is correct and meets the guidance framework set out The Act.
- Informal Route
This is simply where you contact your freeholder and ask if they will be willing to grant you a lease extension and they will then set out the terms upon which they would be willing to do this, then negotiations will commence.
Unlike the statutory route the basic terms are not set and are open to more in-depth negotiation and there is no set time framework so this route could take significantly longer. It could also be much faster than the prescribed route, if both parties agree on the terms. You may still be required to have the leasehold valued by an expert to ensure the premium is a fair one for all parties.
You may have heard of the Leasehold Reform (Ground Rent) Act 2022 which came into force on the 30th June 2022. This confirms that for existing leaseholders entering into voluntary lease extensions the extended portion of the lease will be reduced to a peppercorn. So, unlike the statutory route which reduces the full term to a peppercorn only the new term will be reduced unless you can negotiate otherwise with the Landlord.
This route is more often used where you do not meet the criteria for the statutory route i.e. you have not owned the lease 2 years.
With both routes you should be aware you will be expected to meet the landlord’s legal fees, so this is an additional cost you should factor in.
You should also be aware that when a lease term falls below 80 years you will also need to pay to the landlord a share of what is known as the “marriage value”. When the term is lower than 80 years it becomes significantly less valuable to the leaseholder and more valuable to the landlord. The marriage value is essentially the extra market value for the extended lease. This is another important reason why having an expert leasehold valuer is important.
Where your lease is headed towards the 80 year mark it is important to take action, as soon as possible, to extend it the term and avoid this marriage value payment, as this can considerably increase your costs when you come to extend the lease.
This is a highly complex area of law and it’s important to note that this article is just a brief overview of the process.