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Ins and Outs of Lease Extensions - Frequently Asked Questions

Posted 17/04/2019

If you own a leasehold property, you will be aware of the importance of the lease and its length. Here Holmes & Hills’ lease extension lawyer discusses some of the commonly asked questions regarding lease extensions.

Can you renew a lease at any time?

To statutorily extend the lease on a property, under the Leasehold Reform Housing and Urban Development Act 1993, you need to have been the owner of the property for at least two years. This means you don’t necessarily have had to live in the property for this amount of time, but you must have been the owner for two years. Waiting two years will almost certainly mean that it is more expensive to statutorily extend the lease.

If you are buying a leasehold property, the way to avoid this delay and further cost is, if the seller has owned the leasehold property for at least two years themselves, to request that the seller of the property serves a Section 42 notice to commence the lease extension process and then assign this to you as the new property owner upon completion. This would mean that you do not have to wait two years to extend the lease but, instead, can ‘pick up the baton’ once you have purchased the property. There are, however, procedural requirements however to ensure that the Section 42 notice is properly served and validly assigned.

Notwithstanding the above, you can agree to extend the lease by private treaty (i.e. agreement) with the landlord at any time, so you do not need to have owned the leasehold property for two years. The terms, especially in respect of ground rent, are likely to be different to extending a lease under the 1993 Act however.

When should you extend a lease?

The longer the lease length, the more desirable the property is to potential buyers. If you are not looking to move it is still just as important to look at the length of the lease as anything less than 80 years can cause problems. As the length of the lease falls below 80 years you may encounter issues with re-mortgaging because, as a rule, mortgage providers prefer longer leases on properties. The cost of a lease extension invariably increases as the length of the lease gets shorter over time.

In respect of a statutory lease extension if the existing lease has less than 80 years unexpired then you will pay 50% of the property’s ‘marriage value’ in addition to paying off the ground rent payable to the freeholder. The marriage value is the amount of extra value a lease extension would add to your property. For leases with more than 80 years unexpired no marriage value is payable.

So, generally, the sooner you extend the lease the better but if you wished to extend under the 1993 Act then it is significantly more advantageous to do so whilst there is no requirement to pay the marriage value.

How do you extend a lease?

As above, there are two options when it comes to extending a lease; a statutory lease extension under the 1993 Act or by private treaty.

In each case it is recommended that expert valuation advice is sought (i.e. from a surveyor) to ensure that the price paid to extend the lease is appropriate.

A lease extension agreed by private treaty can be done at any point, so you would not have to wait to own the property for two years and the lease can be extended for any length of time – potentially up to 999 years - subject to the agreement of the freeholder. It will often involve negotiations directly between the leaseholder and the freeholder as to the length of the new lease and the amount that will be paid to the freeholder.

However, the process for an informal lease extension can take longer than a statutory lease extension – this is because there is no statutory time limit that the parties are required to adhere to. Additionally, the freeholder is, as part of any negotiated agreement, likely to increase the ground rent payable but also alter the ‘ratchet’ provisions. The increase in ground rent can, in many cases, be considerable. It is therefore prudent to ensure you have the advice of a lease extension solicitor, but also an expert surveyor, when seeking to extending your lease by private treaty.

In contrast, a statutory lease extension follows a set process under the Leasehold Reform Housing and Urban Development Act 1993 to add an additional 90 years to the length of the existing lease. This means that a lease with an unexpired term of 65 years will, once statutorily extended, become a 155 year lease. The 1993 Act also provides that a “peppercorn” ground rent is payable – essentially meaning that no further ground rent is payable to the freeholder.

The statutory process starts with the solicitor serving a formal notice (called a Section 42 notice) on the freeholder – this gives prescribed information but also proposed terms of the new lease (including the price/premium the leaseholder is willing to pay). The Landlord has a prescribed period to serve a formal counter-notice.

The 1993 Act provides for a timetable of when things need to be done and, if deadlines are missed, then there can be drastic consequences for either party. For example, if there are errors in the Section 42 Notice, or it is incomplete or not served properly, the effect of this is to prevent the lease being statutorily extended for a year during which time the premium will almost certainly increase and, if it was not due before, marriage value may also be payable. For a landlord, a failure to serve in time can result in them receiving a lower premium than they might otherwise have been able to recover under the provisions of the 1993 Act.

It is therefore important that a statutory lease extension is handled properly.

Furthermore, if the Section 42 notice does not quote a reasonable premium this can invalidate the notice. For this reason, we always recommend that expert valuation/surveyor advice is sought – not only to ensure that the premium paid for a statutory lease extension is reasonable but also to avoid further delay and cost in extending the lease arising from an issue with the Section 42 notice.

Looking for further information?

If you have questions regarding a lease extension please contact our specialist lease extension lawyer, Keeley Livingstone, on 01376 320456 (Essex) or 01787 275275 (Suffolk).

 




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