Lease extensions are particularly common in London with the thousands of houses converted into flats. It is often necessary to start the statutory procedure to extend, based on 2 years ownership, whilst in practice, most extensions are agreed by consent. The reason for this is that the freeholder cannot resist the extension as long as you qualify to extend and comply with the procedure, and the premium will be within a fairly narrow band. Consequently, there is little real incentive for freeholders to be difficult, but some still are !
Our fees for extending a lease
For leaseholders, we charge a fixed fee of £750.00 plus VAT for dealing with the paperwork necessary where an extension has been agreed directly with the freeholder outside of the statutory legal framework.
Our fixed fees for dealing with service of the necessary notice on the freeholder and dealing with any counter notice served by or on behalf of the freeholder under the statutory procedures is £950.00 plus VAT plus disbursements. This does not include dealing with any necessary consent from your current mortgage lender which is an extra cost of £150.00 plus VAT, but does include approving the deed confirming the extension and also registration at the Land Registry.
We can also assist with negotiations on the premium to extend a lease and do so on a time spent basis, since each matter is different. If you are unable to reach an agreement with the freeholder after exhausting negotiations and the statutory procedure, you would need to apply to the Leasehold Valuation Tribunal to decide the correct premium. Our litigation department can assist with such applications, which are chargeable on a time basis.
In instructing Darlingtons, you can be assured of specialist and accredited expertise. We are members of the Conveyancing Quality Standard panel of the Law Society. As things stand, not many law firms have achieved the necessary standard, which also involves ongoing monitoring.
In order to be able to exercise this right, you must satisfy certain criteria.
The Qualifying Criteria
To use this process the property in question must be a flat. In order to have the right to extend your lease, you will have to be able to show that:
• You have owned the lease for a minimum of 2 years. It is important to note that the duration of your ownership is not calculated from when you purchased the property but from the date that you were registered as the leasehold proprietor at the Land Registry. It is also worth noting that if a tenant who was entitled to exercise the right dies, their personal representatives are able to exercise the right on their behalf.
• You hold the property under a lease with a long term. If when the lease was granted it had a term of more than 21 years, this requirement is likely to be satisfied.
Early Investigations – What Steps to Take
It is of paramount importance that investigations into the above qualifying criteria are carried out an early stage. The following factors must also be looked into as soon as possible in order to ensure that potential problems are avoided:
What is the Unexpired lease term?
You must check to see what length of the lease term remains. If the remainder of the term is 80 years or less, you will be liable to pay what is known as marriage value which can potentially be substantial. This should therefore be ascertained as soon as the option to extend the lease is considered.
The likely cost (premium) to extend the lease
As stated above the price payable is calculated in accordance with a statutory formula but is commonly negotiated using the formula as a guide. Whilst there is no requirement to have a formal valuation, this is usually advisable as having a detailed valuation carried out by an expert surveyor enables you to negotiate with certainty. It is also advisable to ascertain the likely premium at an early stage to ensure that obtaining a lease extension is financially viable.
Try to negotiate a lease extension
Either with your freeholder or their managing agent outside of the statutory procedures laid down by the Leasehold Reform Act. In this case, you are somewhat in the hands of the freeholder. They do not have to offer you what you are entitled to under statute. You might not achieve a 90 year extension and you may not get a nil ground rent and you may have to pay a higher premium. On the other hand, particularly if you are not yet a qualifying tenant yourself, you get the certainty of the extension and the certainty of an exchange with your buyer and your legal costs should be lower than going through the statutory process.
If the lease extension is successfully obtained, you have the legal right to be granted a new lease with a term equal to the remainder of the term under your existing lease plus a further 90 years. The extension will also result in the ground rent being reduced to a peppercorn.
Procedure for lease extensions
There are set procedures required to force a freeholder to extend a lease, and these issues are becoming increasingly common as a prelude to selling a flat which has 70-80 years or less left to run.
• Extend before there are less than 80 years left to run – The general rule is that the shorter the lease the more expensive it is to extend. Anyone with a lease approaching 81 years unexpired should seriously think of extending it as soon as possible. As soon as a lease has less than 80 years to run, under the relevant legislation the Landlord is entitled to calculate and charge a larger amount, based on a technical calculation, and somewhat strangely known as “marriage value” which is payable to the landlord.
• Check your eligibility – A tenant cannot use the legislation to force an extension unless he/she/they have owned the flat for 2 years. Ownership is relevant not occupation. The original lease needs to be long (over 21 years) and it should be residential, as opposed to commercial use. The legislation does not apply to some landlords such as the Crown, National Trust and charitable housing Trusts, although the Crown usually complies with the principles of it.
• Instruct an experienced, specialist property solicitor – the lawyer will generally start the process by serving an Initial Notice on the landlord (although an informal, “without prejudice” offer may also have been made) , which will offer a premium for extending the lease. The process of extending a lease has strict time limits once the notice has been served and the Landlord may then serve a counter notice demanding a higher premium, with supporting evidence, or accept the offer made.
• Valuer instruction – You will also need to instruct a valuer, probably a chartered surveyor, to put a value on the lease extension. He will use the valuation formula in the Leasehold Reform Housing and Urban Development Act 1993, as amended. Contact the RICS for a list of local surveyors who specialise in lease extensions. Get a quote in writing first. Most surveyors will charge a fixed fee to prepare the initial report which will avoid hidden extras and disbursements. This fee should cover the initial inspection of the property, reading the lease and making all the calculations. Obviously there are extra charges if the surveyor is asked to negotiate with the landlord or their agent or for any further work required if the valuation cannot be agreed. If they act for several flats in the same building they can usually offer substantial discounts so it’s probably a good idea to team up together, if several of you are going down this route.
• Be aware of costs – Once the Initial Notice is served on the landlord you will be responsible for his/her reasonable valuation and conveyancing costs, as well as your own. The Notice is also important in setting the valuation date
• Avoid agreeing other variations to the lease if possible – Under the Act you are entitled to a further 90 years on your lease with no ground rent payable on the original term or extension, but many if not most extensions are ultimately concluded by negotiation. It is quite common for a landlord to try and agree an increase in ground rent, as a condition for extending quickly and without waiting for notices to expire and/or applications to the Leasehold Valuation Tribunal has that is incorporated within the cost of extending. You still have to pay the service charge for the tribunal. However, such exchanges should be avoided if possible.
• Increased value – Although there are costs involved, the upside is that after the lease extension, your property will usually be more valuable and saleable should you want to sell or remortgage. Buyers are often put off by short leases and mortgage companies won’t generally loan on properties with leases shorter than 60 years, although the exact cut off varies around the market.
• Have finance and lender consent in place – There is not much to add under this heading, save that these extensions can often be done quickly, so have everything you need ready. In order to extend a lease a Land Registry application will be needed and this will consequently require formal consent from your lender, which clearly should be forthcoming without difficulty but may take a few weeks.
• How long does it take to extend a lease? – Subject to how efficient you are, plus your freeholder, his solicitor, your solicitor and your surveyor, this whole process could take from 6 weeks to 12 months.
• Is there a going rate for the premium? – Whether marriage value applies or not, it is possible to ascertain with quite a good degree of certainty the likely premium, and thankfully for tenants, whilst the typical premiums are not cheap, they do not generally run into the tens of thousands.
Many leasehold flat owners are completely unaware that the issue of extending the lease may become an obstacle and delay when selling. It can usually be resolved but often requires some negotiation and possibly delay and extra cost.
The solution to the problem is often :-
• the seller must start the statutory process to extend the lease and serve notice on the freeholder – this is important because the buyer can’t do it – a notice can only be served by a leaseholder who has owned for 2 years.
• the seller tries to agree a premium for the lease extension with the freeholder – it will then be a n issue of negotiation between seller and buyer whether the seller will reduce the sale price to take account of the premium the buyer will pay post completion to the freeholder.
• on completion the seller will assign (transfer) the benefit of the notice served on the freeholder to get round the 2 year ownership issue