Lease extension

How can we help?

This may deter prospective purchasers and the purchaser may not be able to find a lender prepared to lend on a leasehold property with a short lease, and many lenders will require that the lease has a minimum term of 85 years left to run. In these cases when it comes to a sale of their flat, leaseholders will need to consider making an approach to their landlord to extend the term of their lease. This is something that should be considered before any sale, as landlords will tend to have leaseholders at a disadvantageous bargaining position if a lease extension is required as part of an agreed sale.

Agreeing Terms

The landlord may be prepared to agree to extend the term of a lease on a voluntary basis, but in most cases they will only do so on terms which are favourable to them; typically to restore the term of the lease when the lease was granted (e.g. 99 or 125 years) at an increased ground rent with stepped increases (e.g. £150 doubling every 20 or 25 years of the term). Care is needed with any proposed increase to the ground rent, as these are becoming increasingly unacceptable to many major lenders.

If the landlord is not prepared to agree terms for a lease extension, or is prepared to do so only on unfavourable or unacceptable terms, a leaseholder may be entitled to apply for a new lease under the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”).

Under this Act most owners of a leasehold flat are entitled to a lease extension provided that the lease was originally granted for a term of more than 21 years and that they have owned the flat for at least 2 years.

Any new lease under the 1993 Act will be for the remaining term of the existing lease plus a further 90 years and otherwise on similar terms to the existing lease with ground rent no longer being payable.

One of the first steps to be taken in connection with a lease extension is to obtain valuation advice from a surveyor who specialises in this area as to the likely price that should be paid for the new extended lease. This will be based on:

• the current value of the property;
• the length of years left on the lease; and
• the amount of ground rent payable.

What is marriage value and why is extending before the lease gets to 80 years left important?

As the rules currently stand, there is a major advantage to the leaseholder in commencing the lease extension process before the term of the lease drops below 80 years. Once the lease term has dropped below 80 years, the landlord is entitled as part of the lease extension premium to what is known as marriage value. This is effectively the difference in value of the leasehold property with its current lease and with an extended lease. The landlord is entitled to 50% of this figure, so it is well worth commencing the lease extension process before the lease drops below the 80 year mark so as to avoid paying a higher price for it.

Even where the number of years remaining on the lease has dropped below 80 years, initiating the lease extension process should be considered as soon as possible so as to halt the depreciation in value which accelerates as the lease term gets shorter.

Lease Extension process

When instructed in relation to a new lease claim under the 1993 Act, we will undertake the following work on your behalf:

• Check that you are eligible to claim a new lease
• Prepare and give to the landlord your notice under section 42 of the 1993 Act (which contains an offer price based on your valuation surveyor’s advice)
• Protect your notice by registration against the landlord’s title
• If necessary, deal with assignment of the new lease claim (where the property is being sold and the purchaser will take the benefit of the claim)
• Deal with the landlord’s requests to deduce title, pay the statutory deposit (10% of the price offered in the tenant’s notice, payment of which we will request from you) and inspect the flat
• Consider and advise upon the landlord’s Counter Notice and any issues arising out of it
• Negotiate and agree the terms of acquisition (except for the price, which your valuation surveyor will deal with)
• Advise upon the reasonableness of the landlord’s claim for legal costs and/or valuation fees and any ground rent and/or service charges that may be payable on completion of the new lease
• Agree the form of new lease
• Complete the new lease and arrange for payment of Stamp Duty Land Tax (if payable – this will depend on the price paid for the lease extension and whether you own other property)
• Register the new lease at the Land Registry.