What is a lease extension?
A lease extension is a contract between parties (usually just the freeholder and the leaseholder) that adds a continuation period to a long-lease and replaces the current lease with a new one. The contract sets out the dates on which the lease extension begins and ends along with any new terms.
What are the benefits of extending a lease?
A lease extension will increase a property’s market value. As a lease depreciates the closer it is to the end of the term, extending the lease protects the value of it. A relatively long term left on the lease (eg 80 -90 years) is usually required to sell a leasehold property, most financial institutions will not give a mortgage to potential buyers without this and a property with a longer lease is inevitably more attractive to prospective purchasers and mortgage companies. A lease extension may also provide an opportunity for the leaseholder to negotiate possible changes in the terms of the lease.
When should a leaseholder consider a lease extension?
Ideally a lease should be extended before the term of the lease reaches 80 years. The fewer years left to run on the lease the more the lease extension will cost and when the term remaining is less than 80 years the freeholder is entitled to add half of the ‘marriage value’ to the calculation of the price, thus substantially increasing the cost of the extension (Marriage value is the additional value of the leasehold and freehold interests combined).
What costs are involved in a lease extension?
If a leaseholder is considering a lease extension they will need advice from a qualified valuer. This will provide an indication of how much the lease extension will cost. The valuer will be able to estimate the highest and lowest figure the leaseholder should expect to pay. There is rarely an agreed fixed price for a lease extension, unless this can be achieved through negotiation in which case the leaseholder would still need to be aware of the estimated price range. A lease extension calculator is available on the LEASE website which may help give a rough idea of the lease extension cost:
In addition to the cost of the lease extension the leaseholder will need to pay their own legal fees as well as the freeholder’s reasonable costs for employing solicitors and other professionals. This would not include any administrative or legal costs in relation to cases referred to an FTT.(First Tier Tribunal)
What is the legal right to lease extension?
The Leasehold Reform Housing and Urban Development Act (LRHUDA) 1993 gives most leaseholders the right to have a new lease for a term of 90 years, which is granted in addition to the number of years they have left on their existing lease. The landlord can only charge a peppercorn rent, which means there will be no significant ground rent for the entire term.
What is the eligibility for the legal right to lease extension?
To qualify for the legal right to a lease extension the leaseholder must have held the leasehold interest in the property for at least two years; and have
a lease that was originally granted for a term of more than 21 years; (it does not matter how long is left to run on the lease); or
a lease of 21 years or less that includes a clause allowing a perpetual right of renewal;
a shared ownership lease where the leaseholder’s share is 100%; or
a lease that has expired where the flat-owner has become a tenant and the landlord had not served a notice to try to bring the tenancy to an end.
However, there are some exclusions but they are generally rare.
What initial steps does the leaseholder need to take?
The formal procedure begins with the service of the Tenant's Notice on the landlord and it then follows a process set out in the legislation. Prior to serving this Notice it is advisable for the leaseholder to spend some time ensuring they have all of the information and knowledge to complete the process, by carrying out the following:
1. Checking eligibility.
2. Choosing and employing professional advisers.
3. Obtaining an estimate of how much the lease extension will cost.
4. Ensuring that sufficient funds will be available.
5. Gathering the information.
6. Having the Tenant’s Notice prepared.
Although it would be the usual practice, the above need not be followed strictly in order and in most cases several of the above will take place at the same time.
What professional assistance is needed?
At some stage prior to the service of the Tenants’ Notice and to help on an ongoing basis, We strongly advise the leaseholder to employ a legal representative as well as a valuer. In addition to the advice they can provide, there are a number of actions throughout the lease extension process they can help with which include:
Preparing documents that are required for the lease extension application.
Drafting and serving the Tenants’ Notice on the competent landlord and sending copies to any other parties with an interest in the freehold.
Responding to the landlord if they request information.
Negotiating any new terms and dealing with the conveyancing of the new lease.
Getting Started?
The leaseholder and their professional representative will need to gather all of the necessary information to ensure the Tenants’ Notice is correct and valid before being served on the landlord. They may also need to respond to possible challenges from the competent landlord following the service of the Tenants’ Notice.
What happens if the landlord cannot be found?
If, the landlord cannot be found or contacted, after the leaseholder has made reasonable efforts, this should not prevent a lease extension. This issue can be resolved in these ways:
If the landlord is in receivership or made bankrupt, the Initial Notice may be served on the receiver or the ‘trustee in bankruptcy’. As either the receiver or the trustee would have the status of landlord at that time they would need to comply with the legislation and deal with the application for lease extension.
The Tenants' Notice cannot be served. In circumstances where the landlord cannot be found and the Initial Notice cannot be served the leaseholder may make an application to the county court for a Vesting Order. If the court determines that the leaseholder has the right to a new lease then it will allow the leaseholder the lease extension in the landlord's absence.
The Tenant’s Notice?
Serving the Tenants’ Notice is the first formal stage for a leaseholder trying to exercise their legal right to a lease extension. The leaseholder will be liable for the freeholders’ reasonable costs from the date the freeholder receives the Tenants’ Notice whether they complete the lease extension process or not. It is essential that the Notice is accurate and complete as, although any errors can be corrected by application to the county court, it is an unnecessary expense the leaseholder will wish to avoid.
What happens next?
After the Tenants’ Notice has been served the landlord will have a legal right to ask the leaseholder for details of the title to their flat including the length of ownership.
The landlord has 21 days from the Tenants’ Notice being served in which to request the above information. If this information is requested it must be provided within 21 days and therefore any leaseholders applying for lease extension need to ensure their solicitor has all of the necessary information and documents to allow a response within this relatively short period.
Does a deposit have to be paid?
The landlord has the right to request a deposit at any time after receipt of the Tenant's Notice. This deposit is limited to 10% of the premium that has been proposed in the Tenant's Notice, or £250, whichever is the greater.
Can a new owner continue with an application for lease extension?
Once a leaseholder has served a Tenants’ Notice on the landlord they can then sell the flat with the benefit of the application for a lease extension already in place. It will mean that the new flat-owner will be able to proceed with the application, without having to wait for the usual two years’ ownership qualification. This should prove helpful in cases where a lease with only a short time left to run which usually means that a prospective purchaser finds difficulty in obtaining a mortgage.
What is the landlord's Counter-Notice?
The landlord must serve the Counter-Notice by the date in the Tenants’ Notice; this must:
agree to the leaseholder’s right to the lease extension and accept their terms;
agree to the leaseholder’s right to the lease extension but propose alternative terms; or
not agree to the participating leaseholders right to lease extension and set out reasons why (this may then need to be determined by the county court if it cannot be resolved through negotiation); or
neither agree or disagree, but clarify that the lease extension is being refused due to an intention of the landlord to redevelop the whole or a substantial part of the premises. This will only apply in relatively few cases where the remaining period of the lease is less than five years from the date when the Tenants’ Notice was served.
What will the terms of the new lease be?
The leaseholder will need to be aware of provisions set out in legislation regarding the terms on which the lease relating to the lease extension can be granted:
To be at a peppercorn rent, which means there will be no significant ground rent for the entire term of the lease, which will be 90 years, plus the number of years left to run on the existing lease.
To be on the same terms as the existing lease, subject to relatively minor amendments and statutory exclusions and additions:
1. Amendments, to make reference to any alterations to the flat, or the communal parts of the building, since the existing lease was drafted or to remedy a defect in the lease under Section 35 of the Landlord and Tenant Act 1987.
2. Exclusions - since the LRHUDA allows a legal right to perpetual renewal of the lease, any existing clauses relating to restrict renewal or early termination are to be omitted from the new lease.
3. Additions - a requirement for the leaseholder applying for the lease extension not to grant a sub-lease of sufficient length, which would allow any sub-lessee a legal right to a lease extension.
Seagull Legal Services has extensive experience in this field which holds many traps for the unwary. Contact us on 01273 952090/ 0345 065 005 or email legal@seagulllegalservices.co.uk
Remember, don’t delay; the shorter the lease, the more you pay.
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