A common question we often get asked is ‘when should I extend my lease?’. The answer is almost always ‘as soon as possible!’. Once clients have bought a flat and been through the emotional roller-coaster that is sometimes involved with buying a property, they often have little appetite for further legal transactions. However, the decision to delay extending their lease often comes at a cost.
Very often, life events, such as unexpected relocation for work, becoming a parent, divorce or separation mean that a client is suddenly faced with a ‘forced sale’ situation. At that point, if the lease is too short, it may be difficult, if not impossible, for the flat owner to sell their flat without extending the lease.
Most lenders have specific requirements for the length of lease which will be acceptable as security. If you are trying to sell your flat quickly with a short lease, and the freeholder is not willing to grant a lease extension quickly, or on reasonable terms, you will be forced down the route of a ‘statutory’ lease extension under the 1993 Act.
Whilst this gives most flat owners the right to extend their lease, because of the time limits within the Act, the process takes many months from start to finish. In addition, current Land Registry delays mean that, even once the new lease has been granted, the time to register the new lease can be anything between six months to a year.
The first stage in the lease extension process is to instruct a suitably qualified valuer. The valuer’s task will be to calculate, according to the 1993 Act, the premium that should be paid for a lease extension. The lease that will be granted under the Act will add a further 90 years to the term, and ‘expunge’ the ground rent, so that a nil or ‘peppercorn’ rent is payable.
The procedure requires the leaseholder to serve a notice on the freeholder, requesting a lease extension and stating the price that the leaseholder is prepared to pay. The freeholder replies by way of a counter-notice, stating the premium that that freeholder will accept. There then follows a fairly complicated process that eventually results in the premium being agreed, and the new lease being granted. The Act requires the leaseholder to pay the freeholder’s solicitors and valuation costs.
It is important to note that the formula used to calculate the premium payable means that, if the years remaining under the lease have fallen below 80 years, then the flat owner must pay, in addition to the other amounts under the Act, a proportion of what is called ‘the marriage value’. This typically adds thousands of pounds to the premium. Leaseholders should ensure that they seek advice and take action well before their lease reaches this critical point.
There are many reasons why a collective enfranchisement is a good idea. Collective enfranchisement occurs when a group of flat owners join together and collectively buy the freehold from the freeholder, under rights given to them under the 1993 Act. There are strict criteria for eligibility. The process is similar to that described above for lease extensions, but the time taken is usually a little longer, because of the number of parties involved.
Once the freehold acquisition has completed, the new freeholders (who are, in effect, the flat owners) normally grant themselves 999-year leases at a nil rent. Buying the freehold collectively can be a sensible option, if everyone is prepared to wait, although it does rely on its success for the group of leaseholders concerned to be resolute and not lose heart, and also being well organised.
Leaseholders also have a right, under some conditions, to exercise what is known as the Right to Manage (RTM). This effectively allows the group of leaseholders to take over the management of their block of flats. The RTM can be a useful alternative where flat owners want to take control, but perhaps they do not have the financial wherewithal to buy out the freeholder’s interest. In my experience however, many groups of leaseholders who initially consult me about exercising a RTM eventually decide to buy out the freehold.
Lenders are becoming increasingly fussy about the terms of flat leases, and it is more important now than ever to seek advice early on, especially if you own a flat where the lease is short. Historically, leases were commonly granted for 99 years, but nowadays if a flat is being sold with, say, 90 or so years left remaining, the buyers will often require a lease extension before proceeding.
If you would like to discuss any of the above issues, please do not hesitate to contact Tom Lumsden by email: TAL@cooperburnett.com or by phone on: 01892 515022.
This blog is not intended as legal advice that can be relied upon and CooperBurnett does not accept any responsibility for the accuracy of its contents.
