Moving Towards an Extended Lease
Leasehold property owners commonly decide to extend the term of their lease. Residential property owners seeking to replace their existing lease with a longer term often pursue an extended lease, which can also be used to modify some other terms of what may be a very old document. Financially, it provides greater security for lenders and can help arrange finance on more favourable terms.
Leasehold Reform, Housing and Urban Developments Act 1993
The right to seek a new lease is sometimes arranged voluntarily with your landlord. When it is done this way, it can be on whatever terms the parties mutually agree to. Where you are not able to agree terms, a leaseholder can instead follow the statutory process for extending your lease instead. Under this procedure, a landlord can be forced to:
- Extend the lease by 90 years (plus the remainder of the term under the existing lease)
- Reduce the rent to being ‘a peppercorn rent’
- Take into account certain other minor modifications
What is involved in the process of an extended lease?
The process starts through the service known as a Section 42 Notice and begins a timescale and obligation to adhere to certain procedures (both by the freeholder and the leaseholder). In order to qualify for this procedure, a leaseholder needs to own the property for at least two years. It must pertain to a ‘flat’ and the property must be subject to a long lease.
Once the statutory process begins, the parties have certain rights and obligations to adhere to.
These rights and obligations include responding within certain timeframes, payment of a statutory deposit (usually 10% of the proposed premium) and negotiating to reach an agreement on the new lease’s terms of acquisition. If this agreement is not possible, the parties can refer the matter to the First Tier Tribunal to have the terms of acquisitions determined; thereby resolving any impasse.
Lease extensions involve a few different parties working together including surveyors/valuers, the freeholder and leaseholders. Some problems can occur when either a freehold cannot be located or if one party does not respond as required under the statutory process. In such situations, the parties can also seek assistance from the Court in applying for a vesting order or otherwise seeking an order of the court for a party to comply with their obligations pursuant to a statutory notice.
When to consider extending your lease
It is particularly important to consider extending your lease if you are approaching 80 years or less remaining. When there are 80 years or less remaining on your lease, a freeholder can seek an additional premium payable as part of the lease extension process (known as Marriage Value). This additional sum, to compensate the freeholder for the loss of reasonable expectation of recovering the property at the end of your lease, can sometimes be a very hefty additional (and avoidable) payment.
Lease extensions (sometimes referred to as lease enfranchisements) have been the subject of a government commission as an area to be reformed. On 19 July 2018, the Law Commission published proposed measures as to how the government could help homeowners buy the freehold of their homes. The proposals focused on removing technical barriers and complex rules, enhancing rights of leasehold owners on estates and improving and simplifying the process.
The changes to leasehold reform are still under governmental review and as such are open to change. Our Property Dispute Solicitors are keeping an eye on developments in this area to ensure we continue to meet the needs of our current and future clients.
What to do next
Whether you seek to extend your lease or you are a freeholder and have had someone serve a notice of lease extension on you, our solicitors with property litigation experience in our Dispute Resolution Department can help you understand the situation you are in. We explain your available options and provide friendly and thorough advice to help you make informed decisions. Once the contentious element of a lease extension process is completed, our solicitors within our Residential Conveyancing Department can also help you move forward from terms of acquisition to completion of the new lease, helping you finalising your property investment in a way that works for you.