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Do you know the process of extending residential flat leases?

 

1.              Summary of your rights

If you own a residential flat you should check the length of the term remaining on your lease.  The lease term is the period for which the lease was granted.  It may have been originally granted for 99 years or 125 years, or longer, but if the remaining term is close to 80 years or below, you need to act now.  The matters set out below do not apply to leases originally granted for 21 years or less or where the landlord is a charitable housing trust and the flat is provided as part of the charity’s functions, or where the lease is a business or commercial lease.   Leases of houses are not included in this article as they are dealt with differently and will be the subject of a separate article.

Even if you are not thinking about selling now, you may well want to sell in the future or leave the flat to your beneficiaries under your will.  However, once the remaining lease term goes below 80 years it becomes less attractive to buyers and will adversely affect the price which can be expected in the open market.  Any buyers must themselves consider having to sell on in the future and once below 80 years the cost of extending the lease (under the Leasehold Reform Housing and Urban Development Act 1993) becomes more expensive.  This is because the flat owner has to pay the landlord a price (called the premium) based on a formula designed to not only compensate the landlord for the loss of ground rent and the fact that the right to get the flat back at the end of the term is postponed by ninety years, but also a “marriage value”, which is in effect the increase in value of the flat following the extension of the lease.   No marriage value is payable where there is 80 years or more remaining, so it will be cheaper to extend the lease before the remaining term falls below the 80 year period.   The premium payable will increase as the lease term decreases.

A reason why a flat becomes less attractive to buyers and less valuable once the remaining lease term is below 80 years is because it begins to get more difficult to get a mortgage.  Any buyer who wants to buy with a mortgage has to comply with the mortgage lenders requirements as to the lease term remaining.  Their requirements could be anywhere between 50 and 70 years, or more, depending on who the lenders are. 

You could negotiate with the landlord direct for a lease extension and indeed, if you have owned your flat for less than 2 years, you can only try to negotiate a lease extension.  Nevertheless, you should see what could otherwise have been obtained under the 1993 Act, to compare.  There are calculators available for free on the internet (the Leasehold Advisory Service has one) which will give a flat owner an idea of the money which would have to be paid to the landlord under the 1993 Act for the lease extension, but these calculators are a rough guide only.  A surveyor would give a better idea.  The Act provides that a ‘qualifying leaseholder’ (basically one who has owned their flat for at least 2 years and whose lease was granted for a term of more than 21 years, or which has a right to renew) can require their ‘competent landlord’, upon payment of the premium, to extend their lease for a period of 90 years from the end of the existing lease term.  Accordingly, if there is only 70 years of the existing lease remaining, the new lease term would be 160 years.  The Act also provides, amongst other things, that the ground rent be reduced to a peppercorn i.e. nothing.   

 

2.              The Competent Landlord

Before you negotiate (or indeed use the procedures under the 1993 Act) you first need to identify the ‘competent landlord’.  This is the landlord who has the ability to grant the 90-year extension.  In most cases this will probably be your immediate landlord, but in some cases your immediate landlord may be a holder of a superior lease which is only a few days, or a few years, longer than yours and therefore you need to identify the landlord with a sufficient interest to grant you the new lease.  

 

3.         Identifying the Competent Landlord

To identify the competent landlord you will need to know the details, especially the length of term, of any intermediate landlords who may be between you and the freeholder.  In many cases that information will be available from the Land Registry but occasionally titles may not be registered.  

You are entitled to obtain details of your immediate landlord, should you not know them, under rights provided by the Landlord and Tenant Act 1985; the information can be requested in writing from the landlord’s agent or the person who collects the ground rent.  The information must be provided within 21 days and failure to do so is an offence.  However, this won’t necessarily tell you who the competent landlord is.  If you don’t know, and the information is not available at the Land Registry, you would need to serve an Information Notice under Section 41 of the 1993 Act, provided you are a qualifying leaseholder (see above).  Section 41 provides a right for you to serve ‘Information Notices’ on the freeholder, the landlord (if different) or any other persons with an interest in the property, requiring details of that interest.

The Information Notices can also require sight of relevant documents, for example giving details of service charges or surveys. The recipients of the Notices are required to respond within 28 days. The service of the Notices does not formally start the application for the new lease or commit you in any way and there is no liability for costs.

If the landlord is bankrupt or in liquidation, the Notice can be served on the trustee in bankruptcy or liquidator and if the landlord cannot be found, an application can be made to the County Court for a Vesting Order; the Court will agree to grant an extended lease but is likely to refer the question of the amount of premium to be paid for it, to the ’First-Tier Tribunal (Property Chamber)’ (it used to be the Leasehold Valuation Tribunal).

 

4.         Starting the formal procedure

If negotiations don’t get anywhere, or should you prefer, you can use the formal leasehold extension procedure under the 1993 Act, provided that, as stated above, you are a ‘qualifying leaseholder’.  If you start the procedure you will have to pay the landlords costs (but not any costs in connection with proceedings before the First Tier Tribunal), including his surveyor’s fees, should he not want to rely on an on-line calculator, as well as your own. 

The matters set out below make clear that if you invoke the formal procedure under the 1993 Act you must be fully prepared. There are time limits to adhere to. You must have expert evidence of the premium you say is payable, in the event the landlord disputes it.   You must have evidence of your legal title to the flat and you must consider whether any modifications, exclusions and additions are required to your existing lease.  You must have sorted out your finances to be able to purchase the lease extension and pay the landlords costs as well as your own.

 

(a)      Serving the section 42 Notice

To start the procedure under the Act you have to serve on the landlord a formal Notice (a section 42 notice) which must contain certain information including the proposed premium.  Whilst the Act does not require you to obtain a professional valuation before you start, it is recommended that you obtain one.  Whilst making a valuation is far from an exact science, a valuer should be able to give a ‘best and worst’ figure, valuing from both the leaseholder’s and the landlord’s perspective and, from local experience, anticipating areas of dispute. 

There is no prescribed form for the Notice but there are certain essential requirements:-

  • it should contain your name and address;
  • it must contain sufficient particulars of the flat to identify it.  The ‘flat’ will include any garage, outhouse, garden, yard and other rights belonging to or enjoyed with the flat; and 
  • it must include particulars of the lease sufficient to identify it – date, term and parties;
  • you must specify the proposed terms of the new lease – these will usually be ‘the terms of the existing lease’ but you can propose certain limited modifications exclusions or additions (as to which see below); 
  • it must contain the name of the person acting and their address for service;
  • it must specify the date by which the landlord must respond with a Counter-Notice under section 45 (as to which see below) which must be a date not less than 2 months after the giving of the notice;
  • it must specify the premium which you propose to pay for the grant of the new lease. The premium proposed in the Notice has to be a genuine proposal made in good faith (see the case of 9 Cornwall Crescent v Kensington & Chelsea LBC [2006] 1 WLR 1186];
  • it must specify separate sums for each landlord where there are intermediate landlords involved  -  this is the complicated bit for which you ought to obtain the advice of  a surveyor experienced in this even if time is short;
  • it must state to whom copies of the Notice are being given.  A copy must be served on every other person known or believed to be a landlord;
  • it must state the name and address (in England or Wales) of the person (if any) appointed to act for you in connection with the claim;
  • the Notice must be signed by the leaseholder or by a solicitor or agent on behalf of the leasehold owner, provided he has their authority to do so;
  • the Notice must be given to the ‘competent landlord’ and any third party to your lease, such as a Management Company or surety (see the case of Free Grammar School of John Lyon v Secchi [1993] 3 EGLR 49);

If you get the notice wrong and withdraw it you will be prevented from issuing a second notice for a period of 12 months from the date of withdrawal, so it is better to serve a second Notice ‘without prejudice to the tenant’s contention that the first notice is valid’. If the first Notice is treated or accepted as invalid and a nullity then you can proceed with the second Notice.    

The Notice date is the valuation date for the lease extension, so if you are getting close to the 80 years, you should serve the Notice as soon as possible to fix the valuation date.  You should, however, make sure that you have the finances available when you serve the Notice.

You will be liable for the landlord’s costs from the date that the Notice is served.  It is important that the Notice does not contain any inaccuracies because an application will then have to be made to the County Court to correct it, which will involve expense and delay.

(b)          The Landlords Response

After the service of the Notice the landlord is entitled to require evidence of your legal title to the flat and of your period of ownership. The landlord has 21 days from the date of service of your Notice in which to request the information. Where this information is required, it must be provided within 21 days and you should therefore ensure that you or your solicitors are fully equipped with all necessary information and documents to enable a response within the time limits.  In the event that these time limits are not met your Notice would be deemed withdrawn with costs payable to the landlord.  Where your Notice is withdrawn or deemed to be withdrawn, it cannot be served again for another 12 months. The landlord also has a right to inspect the flat for the purposes of a valuation, subject to 3 days prior notice being given.

The landlord is entitled at any time after receipt of your Notice to require the payment by you of a deposit. This may be 10% of the payment for the extended lease proposed in your Notice or £250, whichever is the greater.

The landlord must serve his Counter-Notice by the date specified in your Notice; this must :-

  • agree your right to the new lease and accept your terms (or propose alternative terms); or
  • deny your right and give reasons, in which case this will need to be determined by the County Court; or
  • in the case where the remaining period of the lease is less than 5 years from the date your Notice was served, claim a right to redevelop; the landlord can refuse to grant the new lease if he can prove to a court that he intends to demolish and redevelop the building. If that ground is established the landlord will have to compensate you for the value of the flat with a 90 year lease

(c)    Period for Negotiation

Where, after service of the landlord’s Counter-Notice, you and the landlord cannot agree on the premium or some other aspects of the transaction, there is a statutory period for negotiation of at least 2 months but not more than 6 months. After the initial 2 months either party can apply to the First Tier Tribunal for an independent determination on the issue. Clearly, your professional advisers must have all relevant documents at hand to deal with such an application.

(d)    Application for a Vesting Order

In cases where the landlord fails to serve a Counter-Notice by the date specified in your Notice you may apply to the court for a Vesting Order. This application is a request to the Court to grant the new lease to you given the landlord’s failure to serve the Counter-Notice. The Court will grant the order on the terms proposed in your Notice. The application must be made to the Court within 6 months of the date on which the Counter-Notice should have been received.

(e)   The terms of the New Lease

The Act requires the terms on which the new lease is to be granted:

  • to be at a peppercorn rent (i.e. no rent) for the whole of the term (the 90 years plus the present unexpired term);
  • to be on the same terms as the existing lease, subject to :-

           - minor modifications to take account of any alterations to the flat, or the building, since the grant of the existing lease (e.g. reference to gas lighting or coal stores), and

           - certain statutory exclusions; since the 1993 Act provides a right to perpetual renewal of the lease, any existing clauses relating to renewal, pre-emptions or early termination are to be excluded; and

         - additions;  a requirement not to grant a sub-lease of sufficient length so as to confer on the sub-lessee a right to a new lease under the 1993 Act

  • the landlord’s redevelopment right; the new lease must also contain a clause giving the landlord the right to repossession of the flat for the purposes of redevelopment. This right does not arise until the end of the term of the existing lease and is subject to a Court application.  This will not cause any difficulties in mortgaging the flat.

 

(f)       The First Tier Tribunal’s Decision

The First Tier Tribunal’s decision becomes final after 28 days and any appeal against its determination must be made within that time period. The landlord must provide a draft lease within 14 days of the decision becoming final.  Within 2 months of the decision becoming final the new lease must be entered into and if not you must make an application to the Court for the landlord to meet its obligations within 4 months of the decision becoming final.

 

5.         Stamp Duty Land Tax

Finally, the matter of Stamp Duty Land Tax should be mentioned.  It will apply if the premium you pay is more than £125,000 (and that would be highly unlikely) unless you own another residential property or it is not your main residence.  In such a case stamp duty will be payable on a premium of £40,000 or over.   

Disclaimer: This article is not intended to constitute legal advice.  For legal advice in connection with the above, please contact us directly.

 

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