Lease Extension

The basics – Lease Extension/Collective Enfranchisement

In England there are two main ways of owning property – Freehold or Leasehold.

Freehold means you own the building and the land it stands on – you are the ‘freeholder’, otherwise known as the ‘landlord’.

Leasehold means that you own a flat/maisonette (leasehold houses exist but are rare) but not the land it sits on – you are the ‘leaseholder’, otherwise known as the ‘lessee’.

A flat/maisonette is a self-contained unit within a larger building. You have a contract/tenancy with the freeholder for that flat/maisonette which details the legal rights and responsibilities of both parties – this is the lease. The original lease term granted when a flat/maisonette is first sold is long, usually on 99 or 125 year terms (but can be as long as 999 years).

As the lease term is fixed at commencement, it will decrease in length year by year. Over time the value of the flat/maisonette will decline until the eventual expiry of the lease, at which point ownership of the flat reverts back to the landlord.

In 1993 The Leasehold Reform Housing and Urban Development Act was introduced. This, and subsequent amended legislation (in particular the Commonhold and Leasehold Reform Act 2002), provides most leaseholders of flats with the legal right to require their landlord – the freeholder – to sell them either an extended lease on defined terms, or, in conjunction with other lessees in the block, to acquire the freehold (known as ‘Collective Enfranchisement’), at a fair price, subject to qualifying criteria.

Lease extensions can be agreed outside of the ‘The Act’ but as this type of extension is not governed by the legislation, a freeholder is able to dictate terms – these terms generally greatly favour the freeholders.

Our role as surveyors is to act for our clients, whether the lessee or freeholder, initially in providing valuation advice, and subsequently acting in negotiations with the other side to reach a settlement. Ultimately, in very rare cases, where agreement cannot be reached, acting as an ‘Expert Witness’ at a property Tribunal.

Lease Extension

Leasehold ownership – ‘the term’ of the lease

Leasehold ownership of a flat/maisonette is simply a long tenancy, the right to occupation and the use of a flat for a long period – the ‘term’ of the lease. When initially sold they are usuallyon terms of 99 or 125 years (but can be as long as 999 years). As the term is fixed at the commencement of the lease it will decrease in length year by year. Over time the value of the flat/maisonette declines proportionally thereafter, relative to the remaining term/market conditions, until the eventual expiry of the lease at which point ownership of the flat reverts back to the freeholder.

As the term of a lease decreases, the cost of extending it increases. Short leases (considered to be less than 80 years) are an extremely common occurrence and often have an adverse effect on the sale of a property. The cost of extending a lease can increase dramatically once a lease falls below 80 years.

If you have a remaining lease term between 80 – 90 years you should be looking to extend the lease before it reaches 80 years.

For properties with a lease term ofless than 70 years remaining, it is extremely difficult to obtain a conventional mortgage at this time. This would likely have a significant effect when the property is re-sold, as, in effect, it will only be available for purchase to ‘cash buyers’.

Extending a lease

The Leasehold Reform Housing and Urban Development Act 1993 (as amended) is legislation which provides most leaseholders of flats/maisonettes with the legal right to require the freeholder to sell them a 90-year lease (in addition to the remaining lease term), at a fair price, if the appropriate procedures are followed.Additionally any ground rent payments are abolished from the point of completion of the lease extension and your legal advisers will be able to correct certain defects, if applicable, from the original lease.

The main criteria to being a Qualifying leaseholder under ‘The Leasehold Reform Housing and Urban Development Act 1993 (as amended)’ is that you have owned the property for 2 years and the original lease, when granted (not the current unexpired term), was originally over 21 years in length.

Whilst acquiring a lease extension under ‘The Act’ often takes months, as a lessee wishing to sell their flat/maisonette, you can transfer, or “assign” a lease extension application to a buyer, so the purchaser can proceed with the lease extension and does not have to wait the twoyear qualifying period before extending the lease.

Although the legislation/s have made extending the term of leases easier, the legislation requirements can be both confusing andtime consuming and complying with the statutory procedures is a requirement of the Act.

Advisers roles – The Surveyor – Lease extension

This is our role and generally falls into three sections:

1. The first is to inspect the property, review the lease documents, and to carry out an assessment of the likely premium to be paid for the lease extension. Please bear in mind that for a premium assessment we cannot produce definitive values. We will be providing a range within which we reasonably expect the premium to be. Inaddition we will provide a proposed premium figure to be included in the initial Notice – a Section 42 Notice if acting for the lessee /a Section 45 Counter Notice if acting for the freeholder. Whether we act for the lessee or freeholder, the lessee is responsible for our fees under ‘The Act’.The lessee should then liaise with their legal adviser who will proceed to serve the Section 42 Notice on the landlord/s (the freeholder and any ‘head lessee’ if applicable).
2. Within two months of the Section 42 Notice being served the landlord/s must serve a Counter Notice (Section 45 Notice). This will either accept the premium proposed in the Section 42 Notice or contain a higher proposed premium figure. If a higher figure is stated that the lessee does not wish to accept, it is normally at this point that we are employed to act further, this time in negotiations with the other sides appointedsurveyor. Whether we act for the lessee or freeholder, whichever is our client is responsible for our fees in acting in negotiations.
   The vast majority of cases are settled by this point.
3. If the matter has not been settled by this point then ultimately the case will need to be referred to the First Tier Property Tribunal. This is a leasehold tribunal where both the lessees and landlord/s have representation – the surveyors act as ‘Expert Witnesses’ (first duty is to the tribunal) and depending on the extent/nature of the case, legal representation may also be present. Each party is responsible for their own surveyors and legal costs which can amount to several thousand pounds – for this reason, referral to a tribunal is considered a last resort option, and the number of cases that proceed totribunal is relatively small.

Advisers Roles – The Solicitor

You will need a solicitor, ideally one who specialises in Leasehold reform, to act for you.

For a lease extension case the solicitor should be able to:

• If appropriate establish that you are a ‘Qualifying Lessee’, they may need to obtain a copy of your title and lease from the Land Registry to assist with this.
• Collate and prepare all the necessary information for the application, serve relevant Notices, respond to Landlord/s requests for information/Counter Notices, draft or approve the lease extensions and register it with the Land Registry.
• Deal with sale and purchase Conveyancing services if applicable.
• Assignment of the benefit of an initial Notice to a prospective purchaser where appropriate to start a formal lease extension application.
• Any other applicable legal work.

Association of Leasehold Enfranchisement Practitioners (ALEP)

ALEP represents a diverse group of organisations with the following aims:

• To promote best practice among members through an evolving code of practice.

• To provide potential clients with details of member organisations with sufficient knowledge, intent and capacity to provide a satisfactory service.

• To act as a forum for member organisations for the exchange of ideas and to increase standards throughout the sector.

• To represent members’ interests to government, the press, other associations and the general public.

ALEP website www.alep.org.uk

‘LEASE’

The Leasehold Advisory Service (LEASE) is an executive non-departmental public body, sponsored by the Department for Communities and Local Government.

On the LEASE website – http://www.lease-advice.org – there is extensive information on the Leasehold Reform Act (as amended) including guidelines on Lease extension and Freehold enfranchisement.

It also has a free ‘Lease Extension Calculator tool’ which can provide you with a very approximate estimate of the premium to pay for a lease extension.

The advice guides on the site include:

• Living in Leasehold Flats – A guide to how it works
• Lease Extension – Getting Started
• Lease Extension – Valuation
• Application to the First Tier Tribunal (Property Chamber)

To book an appointment for properties in Kent please contact our Head Office on 01732 752099 or for properties in London on 020 80579890 or by e-mail to office@selkentsurveyors.co.uk