22 minute read
Why extend your lease?
If you are a leaseholder, chances are that at some point you will want to extend your lease. STEWART GRAY explains what you need to know
ENGLAND AND WALES still have a feudal land owning system inherited from the Normans and, as a result, all English and Welsh land is technically owned by the Crown. The land on which most property stands is held from the crown using a form of tenure called freehold. This is the nearest thing in law to absolute ownership of land. A freeholder ‘owns’ not only the surface of the land on title but landowner’s rights which extend upwards to the heavens and down to the centre of the earth. When deciding to build a house the freeholder can (with planning permission) build as many storeys as he wishes upwards or downwards and the maintenance of his entire property is his own responsibility. Having built a freehold house the property can be bought and sold with the maintenance responsibility passing along with the ownership in a relatively straightforward manner.
The problem arises when a freehold is divided laterally (into flats for example). If a freehold house is converted into two flats, one above the other, then the two flats cannot each be sold freehold as the ownership rights would clash. The question of maintenance also becomes complicated. Who is to be responsible, for example, for maintaining the roof? Perhaps the upper flat - but if this is a small studio in a large building such an onerous maintenance obligation would render the studio worthless.
The solution is for the freehold to be retained by one entity who owns the land and is responsible for the maintenance of the commonly held parts of the building. The flats are then given long term leases of 99 years or more which can be sold to independent flat owners. The extent of each flat is described in detail on the lease and each of the flat owners maintains their own property. In addition the leaseholders each pay an agreed share of the freeholder’s service charges. This pre-agreed service charge should (in theory) allow the freeholder to maintain parts of the building not covered by leases without disputes arising over what share of maintenance should be paid by the various flats each time any work is carried out. (see pages 53-58 of this issue for more on service charges).
England and Wales still have a feudal land-owning system
AeneAn convAlliS mAurIS mOSELIE NuLLAeXtenDinG YoUr leASe WHAT’S THE COST? Use a professional valuer to calculate the cost of your lease extension and help you negotiate the right deal with your freeholder, says Ben Smith
Since the receSSion, banks have been less inclined to provide mortgages for property with shorter leases and some lenders are now only providing finance for homes with more than 80 years remaining. I have had many vendors come to me who have found a buyer, but the deal has fallen through due to the short length of the lease.
So if you want to sell your flat and it has a short lease, what should you do? The vital first step is to get a valuation – this will give you the information to explain to your buyer how much a lease extension may cost and that cost can then be incorporated into the purchase price.
Choose a valuer who is a member with a ground rent of £10 per year. The calculation to extend this lease consists of three elements: n ground rent income; n reversionary interest; and n marriage value.
The ‘ground rent income ’ is the income stream of £10 for 70 years and the value of this income can be calculated using a capitalisation rate, which estimates future value.
If you do not extend the lease, then after 70 years the flat would ‘revert’ back to the freeholder. The value of this ‘reversionary interest’ to the freeholder is based on the value of the flat and that, given the choice, we would rather be given £10 now than in 70 years time. To take account of this, valuers apply
of the Royal Institution of Chartered Surveyors (RICS). As well as giving you an indication of cost in the form of a valuation report, he or she will also guide you through the legal process and help you negotiate with your freeholder to make sure both parties are getting a fair deal.
Before you can serve notice on the freeholder, forcing them to extend your lease, the law states that you must have owned your property for more than two years. This means that once the property has changed hands, your buyer would not be able to extend for two years, so the thing to do is to serve notice on exchange of contracts and then assign the right of the notice to the buyer. This allows the buyer to continue the process once the sale goes through. As well as assessing the total value of your lease extension, a good valuer working alongside a solicitor, should be able to assist with serving notice, receiving a counter notice and negotiating a final premium.
So how much will all this cost and how is it calculated? As an example, consider a flat with 70 years remaining on the lease To take account of this, valuers apply a capitalisation rate to the value of the flat.
By extending the 70 year lease for, say 90 years (to a total of 160 years) you are essentially ‘marrying’ the existing lease to the new lease. This results in an increase in the value of the flat which is known as the ‘marriage value’ and is the third part of the calculation. By law, the marriage value must be split 50:50 between the leaseholder and the freeholder if there are less than 80 years remaining on the lease, so that both parties benefit. As far as lease extensions are concerned, 80 is the magic number. Every leaseholder should be aware that if your lease drops a single day below that 80 year threshold it could DOUBLE the premium payable if you decide you want to extend it! ●
Ben Smith is a member of the royal institution of chartered Surveyors and is a Director of Allen & Smith chartered Surveyors, with offices in North West London, South East London and Berkshire tel 01491 875828 email info@ allensmithsurveyors.com Website www. allensmithsurveyors.com
assessing the total value of the lease
From the freeholder’s perspective purchasing a freehold investment can be expensive and building management can be a significant burden. For this reason freeholders expect a healthy return on their investments. This is where the freehold / leasehold system is controversial because the two are linked and a return to the freeholder means a cost to the flat owners. Often the main source of income for freeholders is in lease extensions and it is this element that is often controversial. It is here that the lessee’s interests and those of the freeholder most obviously clash. Beware short leases
What is so often forgotten by flat buyers is that it is just a lease that is being purchased not bricks and mortar. The lease is a diminishing asset and as the term reduces so does the value. The shorter the lease becomes, the greater the cost to the leaseholder of extending and the greater the value to the freeholder. For this
reason freeholders generally have no incentive to encourage flat owners to extend. Potential buyers of flats and current flat owners must therefore make themselves aware of the length of their own lease and the cost of extending it. As a rule of thumb anything under 80 years is considered ‘short’ but really even if your lease is approaching 85 years you should start to make enquiries.
There are two linked problems with a short lease: First, anything under 80 years will be difficult to sell and anything below 70 years might not even qualify for a mortgage, limiting the market drastically. The second problem is the cost of extending, which usually runs into thousands of pounds and increases (sometimes dramatically) as the lease term runs down. The key is to make yourself aware of any potential lease length issue and face up to it early before the cost becomes unaffordable. Fortunately leaseholders do now have rights and there is a wealth of advice available, for example the Leasehold Advisory Service which can be easily accessed online at www.lease-advice.org is an excellent resource.
In the past if a lease had fallen below 80 years the freeholder had flat owners over a barrel. Short lease flats could become virtually un-saleable without a lease extension and the freeholder was free to name his price on extensions or refuse to extend at all while the cost rose inexorably. This was recognised to be inequitable and the Leasehold Reform Act was passed in 1993 giving leaseholders the right to extend their lease for a fair price. Under the same Act groups of leaseholders in blocks of flats were given the right to buy out their freeholder completely by what is known as collective
Anything under 80 years will be difficult to sell
enfranchisement. This requires participation by at least 50% of flat owners and there are other eligibility requirements so leaseholders must take professional advice if considering this course. What’s the benefit?
The benefit of extending your lease under the 1993 act is that the entitlement is for an additional 90 years at no ground rent. This means that once extended, flat owners can have the peace of mind that their investment in their own property is secure for a lifetime and the asset is no longer a diminishing one.
A flat with a lease extended under the statutory provisions should sell for full market value even if it is held by the leaseholder for a generation.
Similarly, collaborating with fellow leaseholders to buy the freeholder out resolves the lease length issue because with the freehold purchase comes the right to extend your individual leases by 999 years at any time.
The collective enfranchisement route also has other benefits, particularly if flat owners are in dispute with their freeholders over maintenance (or lack of it). By purchasing the freehold, blocks of flats become effectively co-operatives managing their own affairs in terms of maintenance and insurance and usually make significant savings in the process. In this respect it is similar to the ‘right to manage’ which has more recently been granted to leaseholders but without the limitations. Right to manage is not a remedy for short leases. However if leaseholders are having management issues and do not qualify for enfranchisement it is another alternative to explore.
The Leasehold Reform Act 1993 lays down a formula for establishing the price of extending your lease or buying the freehold
but what constitutes a fair price remains hotly contested. Within the set formula opposite are a number of variables and while one surveyor might put forward a value favourable to flatowners another might take a stance more favourable to the freeholder. For this reason both sides should take independent advice. Generally a settlement price is negotiated between the two sides’ valuers. Where no agreement can be reached the Leasehold Valuation Tribunal (LVT) can determine the price. Often a price can be privately negotiated but valuation advice is essential to ensure that the terms and price of informal deals are equitable while an awareness of the legal process is useful in case they are not. ●
Stewart Gray Principal, Austin Gray, Brighton Tel 01273 201980 www.austingray.co.uk John Byers is founding director of LBB chartered surveyors Tel 020 7822 8850 www.lbb.org.uk
PRICE TO BE PAID FOR PREMIUM OF A NEW LEASE Valuer John ByeRS shows the calculations involvedinvolved in in assessingassessing thethe valuevalue of of a a leaselease andand doesdoes the maths
basicbasic informationinformation
Freehold Value £175,000£175,000 Valuation Date 3/4/103/4/10 Capitalisation Rate 7.0%7.0% Deferment Rate 5.00%5.00% LeaSe Commencement 1/8/81/8/86 6 Term 99 99 yearsyears Unexpired Term 75.375.33 3 yearsyears Ground Rent £80.00£80.00 forfor thethe firstfirst 33 33 yearsyears ie ie tilltill 1/8/19 9.31/8/19 9.33 3 yearsyears £160.00£160.00 forfor thethe remainderremainder of the term ie till 31/7/85 66.00 years Relativity 93.5% Uplift 1%
Value of the freeholder’s existing interest
1 Present Ground Rent Income £80.00
YP 9.33 years @ 7% 6.6861 £535
Future Ground Rent Income £160.00
YP 66.00 years @ 7% 14.1214
PV £1 9.33 years @ 7% 0.5320 £1,202 2 Reversion to Freehold in Possession £175,000
PV £1 75.33 years @ 5% 0.0253 £4,435
Value of Freeholder’s existing Interest £6,172
Reversion to Freehold in Possession £175,000 PV £1 165.33 years @ 5.00% 0.0003 £55 Value of the Freeholder’s Interest after Lease extension £55
Diminution in Value of the freeholder’s interest
Value of Freeholder’s Existing Interest £6,172 Value of the Freeholder’s Interest After Lease Extension £55 Diminution in Value of the Freeholder’s Interest £6,117
Marriage Value
Value of Property after Lease extension Freeholder’s Interest £55
Leaseholder’s Interest Freehold Value £175,000 Relativity 99.0% £173,250 Value of Property after Lease extension £173,305 existing Value of Property Freeholder’s Existing Interest £6,117 Leaseholder’s Existing Interest Freehold Value £175,000 Relativity 93.5% £163,625
existing Value of Property £169,742
Marriage Value Value of Property after Lease Extension £173,305 Existing Value of Property £169,742 Marriage Value £3,563 Freeholder’s share of any Marriage Value 50% 50% £1,782
Premium Payable to freeholder for Grant of Lease extension
Diminution in the Freeholders Interest £6,117 Freeholder’s share of any Marriage Value £1,782 £7,898
Making it haPPen
If you want to extend your lease you will need to take professional advice. Graham Jaffe and KaTie Cohen explain what is involved
The lease exTension process starts with the valuer. A valuation report calculation from a qualified and experienced leasehold enfranchisement valuer (see page 48 for more on the valuer’s role) sets out the likely cost of the lease extension. The valuer will also suggest the premium to be inserted into the Section 42 Notice which triggers the statutory procedure for acquiring the new lease. This premium is generally 15-20% below the valuation.
Enter the solicitor. He or she will include the premium in the Notice to be served on the freeholder and any other landlord and which outlines the leaseholder’s claim to extend the lease. This Notice is pivotal to the whole lease extension process and must be prepared by a solicitor specialising in leasehold enfranchisement. Serving notice
The Notice should preferably be served by hand and proof of delivery requested so that it can’t be disputed at a later date. The Notice must be served on what is known as the ‘competent’ landlord - the person who has the legal right to grant a 90-year lease extension. This is generally the freeholder, although in some cases there may be intermediate landlords as well. All relevant landlords must be served with a copy of the Notice and this also includes management companies and any other party to the existing lease.
The Notice should give a response date not less than two months (two months and ten days is advisable) from the date it was served and the registered owners of the flat must sign the Notice personally. It can’t be signed under a Power of Attorney and if the leaseholder is a company, that company must execute the Notice in accordance with its Memorandum and Articles of Association.
The leaseholder’s solicitor will then lodge a ‘Unilateral Notice’ at the Land Registry against the freehold and any intermediate leasehold titles. The fee payable for this is £50. If the property in question is not listed by the Land Registry (ie, it is unregistered), a
Class C (iv) Land Charge should be lodged. This provides protection for the leaseholder if the landlord decides to sell the freehold and means that the lease extension process will continue as if the new owner had received the Notice.
Fixing the coSt oF the leaSe
The date when the Notice is served fixes the valuation date. This means that variables
WhAT IS ThE rOLE Of ThE SOLIcITOr? Once you have found a solicitor to act on your behalf he or she will:
n Check whether the leaseholder qualifies for a lease extension; n Draft the section 42 Notice and serve it on the ‘competent’ landlord (usually the freeholder) and any intermediate landlord; n Deduce title and pay the statutory deposit to the competent landlord’s solicitor; n Make access arrangements for the valuer/s acting for the landlord/s; n Receive the counter notice and send a copy to the appointed valuer n Arrange for the valuers to open negotiation n Apply to the LVT not less than two months and not more than six months from the date that the counter notice is served. This protects the Notice and makes sure it is not thought to have been withdrawn; and n Negotiate the terms of the new lease with the competent landlord’s solicitor and agree the costs that the leaseholder will be expected to pay. such as the unexpired term of the lease, the present value of the flat and its assumed future value are set and any further changes will not affect negotiations. The competent landlord’s solicitor acknowledges receipt –normally without admitting the validity of the claim – and will include current copies of the leasehold title, a full copy of the lease with a coloured plan and a request for the statutory deposit which equates to 10% of the total premium offered in the Notice. The solicitor will then request access arrangements to the flat so that the landlord’s valuer can carry out his or her valuation of the property.
The competent landlord must serve the leaseholder via his or her solicitor with a ‘counternotice’, no later than the response date specified in the Notice. This will set out whether or not the claim for a lease extension is accepted and any other terms of the lease extension which the landlord may want included in the new lease in due course.
The valuers appointed by the leaseholder and freeholder then have the opportunity to negotiate and agree terms acceptable to both parties. It is open to either party to apply to the Leasehold Valuation Tribunal (LVT) not less than two months and not more than six months from the date of the counternotice. In a minority of cases where agreement can’t be reached by negotiation, the matter can be heard by the LVT who will determine the premium and terms of the lease extension if these can’t be agreed in advance of the hearing. What Will it coSt?
Leaseholders are liable for their own legal and valuation costs and – where one is needed – the fees of a barrister and/or valuer to represent
Get good advice from an experienced solicitor them at the LVT. There will also be Stamp Duty Land Tax to pay if the premium is more than £125,000 (refer to HMRC for current rates) as well as Land Registry fees and other costs such as search fees. The leaseholder is also expected to pay the landlord’s reasonable legal and valuation fees. Legal fees are limited to the costs related to consideration of the Notice; requesting deduction of title and the statutory deposit; requesting access details in order to carry out the valuation and the valuer’s fee; and dealing with all aspects of conveyencing through to completion. The premium paid for extending the lease is established from the outset by the valuer and the way this is calculated is explained in detail on page 49. GettinG it riGht
Reasons why a lease extension may not be granted are: n If there are inaccuracies in the original Notice; n If the premium offered in the Notice is unreasonably low; or n If the property has not been owned and registered at the Land Registry for a period of two years. To make sure your lease extension goes through as smoothly as possible it is vital that you get good advice from an experienced solicitor. Leasehold enfranchisement is a complex field of law so make sure you get it right first time and choose a solicitor and valuer with a proven track record in the leasehold sector. ●
graham Jaffe and Katie Cohen are Partners with JPC Law email gjaffe@jpclaw.co.uk and kcohen@jpclaw.co.uk tel 020 7644 7260 and 020 7644 7261 Website www.jpclaw.co.uk
A BArriSter’S role in A leASe extenSion ClAim When a lease extension claim goes wrong its time to appoint a barrister to work on your behalf, says StAn
gAllAgher
Applying for A lease extension should be less complex than a collective enfranchisement application. All the leaseholder is trying to do is to substitute the existing lease of the flat for one that is 90 years longer and will usually be in the same terms as the existing lease, save that the ground rent has been extinguished.
What could possibly go wrong? In theory a great deal, though, in practice, particularly in the current nervous property market, most claims complete in a more or less satisfactory manner on terms agreed through negotiations between the parties, usually conducted through the respective valuers.
However, this is not always the case.
It is when (or preferably before) complications strike that it is important to obtain specialist legal advice, whether from a barrister, or from a solicitor with sufficient experience in enfranchisement litigation i.e. in dealing with the Court or LVT/Upper Tribunal fallout from a contested claim.
Specialist advice is likely to be required where the landlord responds to the leaseholder’s notice of claim by denying the right to a lease extension and/or asserting that the notice of claim is invalid.
It is particularly important to ensure that the claim is effective when, as frequently occurs on the sale of a flat with a short unexpired lease term, the flat is sold with the benefit of a tenant’s notice of claim served by the vendor leaseholder. In such cases, if it goes wrong, it will not be possible for the purchaser to serve a further tenant’s notice until the purchaser has owned the flat for at least two years. The resultant delay could be disastrous, particularly if the lease has less than two years to run.
What if the extent of the premises originally demised by the existing lease does not accord with the facts on the ground, say if, over the years, the leaseholder, or a former leaseholder, has incorporated the roof void into the flat, or erected a balcony on a flat roof outside the flat, or taken exclusive possession of land that started out as communal amenity land or parking, or has otherwise encroached upon the landlord’s retained property. Depending on the circumstances it may be that these additional areas should be treated as accretions to the existing lease and therefore fall to be included in the extended lease granted on a lease extension claim. Pursuing such a claim will require specialist legal advice.
At a LVT valuation hearing (which will be required if the claim is admitted but the parties cannot agree the premium for the new lease) a valuer will often be retained to act in a dual role, as both advocate and expert witness. In a typical low to medium value claim this should be a cost effective approach (as the LVT only has very limited powers to award costs each side will pay its own costs of the hearing regardless of the outcome).
The factors that point to instructing a barrister for the hearing are first, value i.e. how far the valuers are apart and second, legal complexity. For example if there is a valuation-sensitive dispute as to the terms of the existing lease, such as its rent review provisions, or the extent of its restrictions on sub-letting or alterations.
To this I would add that the role of advocate at a hearing is fundamentally different to that of the expert witness. The advocate’s duty is to promote the interests of the client by making submissions as to the law on point and the factual and expert evidence before the LVT. The advocate cannot give evidence or venture a personal opinion as to the law or the facts (unless asked to do so by the LVT, which, generally, should not happen). An expert witness on the other hand owes an overriding duty to the LVT to assist it by giving independent, objective and unbiased expert evidence, in other words, to tell the LVT what the expert’s true opinion as to the disputed values is.
An expert witness doubling up as advocate necessarily involves trying to wear two quite different hats. As a fashion statement this is fraught with danger and it is unlikely to be practical in rough conditions. ● exclusive possession of land that started out as communal amenity land or parking, or has otherwise encroached upon the landlord’s retained property. Depending on the circumstances it may be that these additional areas should be treated as accretions to the existing lease and therefore fall to be included in the extended lease granted on a lease extension claim. Pursuing such a claim will require specialist
At a LVT valuation hearing (which will be required if the claim is admitted but the parties cannot agree the premium for the new lease) a valuer will often be retained to act in a dual role, as both advocate and expert witness. In a typical low to medium value claim this should be
Stan gallagher is a Barrister at Tanfield Chambers, London, specialising in landlord & tenant law
