Lease Extensions and Enfranchisement Claims
Informal Lease Extensions: The solution to the formal process?
When a lease falls below 80 years many leaseholders find that there is little that they can do with their property. Many mortgage lenders will not lend on a leasehold property which is under the 80- 85 year mark, and leaseholders that fall into this category can find it hard not only to refinance their property but also to sell the property without first extending their lease, as potential purchasers would need to be ‘cash buyers’. This means that a leasehold property with an unexpired term of less than 80 years can be deemed to be worth less than an identical one with a much longer lease.
For many, the statutory route to extend their lease, is more favorable than agreeing to extend the lease by informal agreement, as the statutory route entitles the leaseholder to an additional 90 years plus their unexpired lease term and reduces rent to a peppercorn. However, this route is not always possible for many leaseholders.
In order to extend a lease via the statutory route and pursuant to the Leasehold Reform Housing and Urban Development Act 1993 the property must have been registered in the leaseholder’s name at HM Land Registry for a minimum of two years. Where leaseholders do not meet this two year requirement they can approach their landlord, once having obtained the expert advice of a surveyor as to the terms, and with a view to agreeing terms of a lease extension directly with their landlord. However landlords are not obliged to agree to an informal lease extension.
Whilst an informal lease extension is a solution to any leaseholder not meeting the qualification period and sometimes even those that do, expert advice should be sought from a surveyor with regards to acceptable premiums (a premium being the price payable for the additional years granted) and ground rents, and from a solicitor in relation to the drafting of the new Lease. If a leaseholder has 80-85 years unexpired term left on their lease surveyors and solicitors will be able to advise if it would be more beneficial for a leaseholder to proceed down the statutory or informal route based on the specific circumstances. Unlike the statutory route, an informal lease extension can be agreed directly between a freeholder and a leaseholder on any terms they agree.
However, this route should be approached with caution by leaseholders as often ground rents are imposed and the landlord is free to propose any terms which may be included in the new lease with regards to term, ground rent and premiums payable or indeed to seek to change the terms of the lease itself.
There is also no strict timeline for either landlords or leaseholders to adhere to in such a transaction and the landlord is not bound to honor the terms until the new lease is actually entered into. Further to this, if a leaseholder has a mortgage over the property, the consent of the lender will need to be obtained to the lease extension unlike the statutory route whereby the consent is automatically applied under the legislation.
Whichever route is embarked upon, a leaseholder should look to extend their lease in good time prior to the lease nearing 80 years unexpired term. Once a lease does hit 80 years or below, the premium will be increased due to the ‘marriage value’ payable to the landlord.
Shelley Fitzpatrick a solicitor at Mullis & Peake LLP solicitors who specialises in residential lease extensions, said:
“Informal lease extensions can offer an alternative route to the sometimes long statutory process to extend a lease, and help overcome the issues surrounding the qualification criteria within the statute. It can allow leaseholders to sell or remortgage their property and not be bound by the strict timelines of the statutory process whereby, for example a notice would need to be served on a freeholder and then they would have to wait a minimum of two months for a counter notice to be received from the freeholder indicating what they hope to achieve by way of a premium.
“It is, however, extremely important for leaseholders to seek advice from surveyors who specialise in the field of lease extensions when it comes to negotiating a premium as well as legal advice on the contents of a draft lease and if the informal process is the best option weighing up the unexpired term of the lease and if the leaseholder meets the qualifications for a statutory lease extension. It is also worth bearing in mind that there are no limitations as to what a landlord may or may not include within a lease and without the strict statutory time lines, sometimes informal negotiations can take much longer than anticipated.
“The informal process can offer an alternative to the statutory process and does in many cases offer an effective route for leaseholders to extend their leases.
“However, leaseholders should be particularly vigilant when it comes to ground rents being imposed under the informal route as often neither lenders nor purchasers are happy to accept leases with rising or doubling ground rents. Leaseholders should be aware that although the informal route may offer a lower premium for the lease extension it could attach to it a high ground rent and this could have an adverse effect on the value of their property and cost them more in the long term.
“If you are currently in negotiations with your landlord or thinking about contacting your landlord with regards to an informal lease extension please do not hesitate to contact me on 01708 784032 so that I can offer my expertise on the area.”