The Leasehold Reform Housing and Urban Development Act 1993 gives individual tenants with long leases of most residential flat developments the right to extend their leases for an additional 90 years on top of the residual term of their lease (it is the Leasehold Reform Act 1967 for leasehold houses). The right to a new lease coexists with the right to collective enfrancisement and was introduced in the same statute as that right. The difference is that the right to extend your lease is a individual rather than a collective right. The main questions people want to know the answers to are:
a) Why extend my lease?
b) How does it work? And most importantly;
c) How much will it cost me?
All of these are dealt with below.
Why extend you lease?
I have acted on well over 300 lease extensions over the last couple of years for both landlords and tenants and so am well versed in the procedure invovled. Firstly though, a few thoughts on why should you consider extending your lease?
1. Collective enfrancisement is too difficult
One of the key reasons for long leaseholders to buy the freehold of their building is to protect the value of the leases (ie being able to extend it at will for a nominal premium). Combined with the greater control over repair and maintenance and development that this brings (for a broadly similar cost), buying the freehold is often preferable to simply extending the lease.
However, one of the problems with the right to collectively enfranchise is that is often difficult to gather together the requisite number of qualifying tenants together to proceed with a claim. The legislation requires that at least 50% of the qualifying tenants in the building gather together to bring a claim to buy the freehold. That is quite easy where you have a converted house of say 4 flats. However, there tends to be considerably more apathy for a claim in larger blocks where the coordiantion of 20/30/40 or more tenants is required.
Therefore, a lease extension is often the only realistic choice for tenants who want to protect themselves from the financial consequences of their diminishing lease term and cannot get sufficient support from their neighbours to make an enfranchisement claim.
2. Depreciating asset
As mentioned above, a lease becomes less valuable the shorter it is and at the end of the term you have to give the property back to the landlord for nothing. Not a particualrly attractive proposition. However, the Leasehold Reform Housing and Urban Development Act 1993 solves this problem by entitling most residential tenants with long leases to apply to extend their lease for an additional 90 years on top of the remaining term in exchange for a premium calculated in accordance with a statutory formula. So while you have to compensate the landlord for the extension of the term, you can protect yourselve against the depreciation of the lease.
3. Extinguish the ground rent
Most long residential leases contain an annual ground rent provision payable to the landlord, generally this will be a few hundred pounds a year. However, under the legislation tenants extending their lease are entitled to have their ground rent reduced to zero, which can represent a considerable saving over the remainder of the term of the lease.
How do I extend my lease?
There are two main ways:
1. By negotiation
Just because there is a statutory procedure that you can invoke doesn’t mean that you have to. A direct approach to your landlord may result in an offer to extend your lease without having to go though the process of serving notice and waiting for a counter notice. If terms can be agreed then what follows is a fairly straightforward conveyancing process to complete the transaction.
This should be the most cost effective way of proceeding but comes with a warning. Landlord’s often require at least some of their costs paid up front as that mirrors the statutory scheme. However, in practice I often find that this immediately weakens a tenants negotiating position as the landlord is not under any duty to make a reasonable proposal.
2. Statutory notice
The legislation allows qualifying tenants to extend their lease by 90 years on top of the existing term at a peppercorn ground rent in exchange for payment of a premium governed by a statutory formula. If the terms of the lease extension can’t be agreed between the parties then the legislation provides for the Leasehold Valuation Tribunal to determine the issues in dispute. This is the advantage over the negotiated route but it is in general a more time consuming and expensive process.
Which one is right for you? That depends upon the circumstances that you are faced with. In general I would only recommend the negotiated route where time is of the essence or if paying a reasonable premium is not that important. This is because the statutory procedure has some inbuilt fairness that puts commercial pressure on the parties to reach a sensible settlement (see cost explanation below).
Almost the first question I’m asked by tenants who want to extend their lease is “what will it cost?”. Valuation advice is beyond a solicitors competance although we may anecdotally have some idea. I always recommennd to tenants considering extending their lease that they obtain a formal valuation. A proper valuation is important in establishing a realistic price for the lease extension in order that you can measure any offers made by the landlord against an objective marker. It is important to ensure that you have appoint an expert with suitable experience in the field of lease extensions. This is because once notices have been served it is generally your surveyor who is conducting the negotiations and those unfamiliar with the valuation methodology will not be able to negotaite you the optimum agreement.
The legal processes are very difficult to begin without a valuation because as a tenant you risk invalidating your notice by specifying an unrealistic premium in it. In a negotiated setting, the valuation should be able to help you understand if the landlord has made you a competitive offer.
I work with many valuers all over London and the South East and am always happy to make a recommendation.
If you reach a negotiated agreement with your landlord then the procedure to extend your lease is quite straight forward. A Deed of Variation is usually used to update the term and ground rent provisions of the lease and record the premium paid. If you have a mortgage then consent of your mortgagee may be required along with a Deed of Substituted Security which secures the mortgage against the extended lease. This is all registered at HM Land Registry and the process is complete . This exercise can usually be completed in a couple of weeks once terms are agreed, although where management companies are involved they can cause some delays.
If you are following the statutory procedure then the legislation is the starting point as it provides a strict timetable:
i) Firstly, you serve your notice on the landlord, any superior landlord and any third parties to the lease, such as a management company.
ii) The landlord then requests payment of a 10% deposit and commissions its own survey/valuation.
iii) The landlord must then serve its counter notice within the period specified in the tenants notice (not less than two months).
iv) There is then a period of two months for negotiations on any of the terms in dispute. Thereafter, either party can apply to the Leasehold Valuation Tribunal to determine any of the terms in dispute. The tenant must make this application within 6 months of the date of the counter notice or their claim is deemed withdrawn.
v) Once terms are agreed then the form of draft lease is agreed. There are specific regulations governing the timing of the preparation and approval of this document and it should be agreed within 42 days of the agreement of terms.
vi) The new lease must complete within 4 months from the date that the terms of the lease extension are agreed or determined by the LVT. If no application is made to court in time then the tenants claim is deemed withdrawn.
As you can see, the statutory process can take around 9-12 months even without a contested LVT claim which can easily add another four months to this timetable.
Deemed and Express Withdrawal
Once you have started the process there are penalties for failing to complete it. The statutory deadlines are strict and a failure to make the appropriate LVT or court application results in the tenants claim being withdrawn.
If circumstances change and a tenant can no longer afford to or does not want to proceed with the claim then it can also be withdrawn.
In either case once the claim is withdrawn the tenant is prohibited from starting the claim again for a period of 12 months me will also still have a liability for the landlords costs.
Section 60 of the 1993 Act sets out that tenants are responsible for the landlords reasonable costs of investigating their right to a new lease, their valuation and conveyancing costs. These are of course in addition to the tenants own costs.
Neither party is entitled to recover their costs of any LVT proceedings under the terms of the Act. The position is different if there are court proceedings relating to the validity of the notice or a failure of either party to complete according to the timetable. While the legislation makes no provision for statutory costs liability in those circumstances, the court rules can provide for the successful party to recover a proportion of their costs.
Lease Extension Quotation
Now you’ve read this far, why not email me for a costs quotation to extend your lease at email@example.com. Most of the costs are fixed to completion and there are no hidden charges.