Many of us understand that the principal difference between freehold and leasehold property is that with a lease it is only granted for a certain number of years (often referred to as the ‘Term’). When buying a brand new property the length of the Term will seldom be a consideration as they will normally be for a Term of at least 99 years. As time goes by however, a shorter Term may cause problems if you are looking to sell or alternatively consider a mortgage. Indeed, many purchasers and lenders will insist on a lease with a Term length akin to that of a brand new lease.
Fortunately, there are options a leaseholder can take in looking to extend a lease Term. These fall under two main camps:
- A voluntary extension negotiated with your Landlord, or
- A statutory extension under the Leasehold Reform, Housing and Urban Development Act 1993 (‘the 1993 Act’).
Looking to deal with a statutory lease extension of a house it a little different and in most cases may involve enlarging the lease to actually become a freehold. Here we will focus on leasehold flats.
Both extension processes come with their positive and negatives which we look at principally in respect of leasehold flats briefly below:
Many Landlords will consider an extension of the lease Term on a voluntary basis if approached by a Tenant. This will generally involve paying a purchase price or ‘Premium’ to the Landlord for the extension. The reason for this being that with less years to run, a Landlord’s freehold becomes more valuable. The longer a lease Term, the longer it would be before a Landlord has vacant possession of its freehold and so would be worth less.
The first port of call would be for your solicitor to approach directly the Landlord requesting if they would consider an extension and, if so, on what terms. Unlike a statutory extension, a Landlord does not have to:
- Grant an extension of the Term by any minimum length;
- Agree for any ground rent to be reduced or for any other lease changes;
- Limit its legal and professional costs to any reasonable level, and
- Take into account any particular factors in ascertaining the Premium.
So why would you consider a voluntary approach? The main reason is down to time. Undertaking a statutory extension is a contentious process involving the serving of notices and minimum response periods. It could take many months before terms for any extension are event agreed which in the case of sale or a mortgage would most likely not be acceptable. Equally, as most Tenants will have a statutory right to extend, there is little incentive in a Landlord acting completely differently in agreeing a voluntary extension than they would do in the case of a statutory one.
If a Landlord is uncooperative or otherwise terms for an extension cannot be agreed, it may be necessary to go down a statutory route.
To qualify, you broadly need to have owned your flat for at least 2 years. If the qualifying criteria are met, the 1993 Act entitles leaseholders to:
- a further 90 years on top of the existing Term;
- ground rent to be reduced to a peppercorn (if already greater); and
- on similar terms to the exiting lease
So, if you have an existing lease with a Term of, say, 60 years and pay a ground rent of £100.00 per annum, you would be entitled to a new lease with a term of 150 years (60 plus an extra 90) and a ground rent of a peppercorn (£0.00).
You would still need to pay a Premium for the lease though the calculation of this is governed by the 1993 Act. If you have less than 80 years left to run, your Premium will most likely be higher.
A Landlord is also entitled to have its reasonable legal and professional fees paid for.
The process starts by the Tenant having a valuation prepared to ascertain the Premium. Provided the qualifying criteria are met, the Tenant then serves notice on the Landlord setting out the terms for the proposed extension. The Landlord has up to 2 months within which to respond.
So, why choose the statutory approach? Well, although it is a longer process it does give qualifying Tenants a legal right to have an extension, regardless whether or not the Landlord consensually agrees. The reduction of any ground rent to a peppercorn can also be an attraction and many Landlords would be keen to avoid this. If you are extending the Term simply as part of any private planning and if you have an existing mortgage, it also avoids the need to obtain consent from your lender. This is because any current mortgage is automatically ported over to your new extended lease.
Whichever route you take, we are Wollens are there to accompany you on your journey. It is also worthwhile looking at the Leasehold Advisory Services’ online calculator to get an indication of what the Premium might be via the following link: https://www.lease-advice.org/calculator/
Ashley Bevans is the specialist at Wollens in this area and can help contact [email protected] or call 01803 225122
Or you can contact anyone on the team at [email protected]