Residential and commercial property solicitor Kuljit Ghalan of Acton law firm LDN Conveyancing Ltd sets out the available option to extend the lease for leaseholders.
Lease extensions under the statutory procedure
Under the Leasehold Reform and Urban Development Act 1993, qualifying leaseholders can make an application to their landlord to extend their lease by adding 90 years to the current number of years remaining.
In general terms, a qualifying leaseholder is
- someone who has been the registered proprietor of the property for 2 or more years.
- Also, when he or she purchased the property, the lease had a term of over 21 years remaining.
Serving Section 42 notice triggers the statutory process. It also has the benefit of reducing the ground rent to a peppercorn rate, i.e. zero if successful.
Lease extensions can generate numerous costs which any leaseholder thinking of an extension should keep in mind.
For example, the premium payable to the freeholder for the extension is often the most significant matter to consider. The procedure for calculating the premium can be complex. Also, the amount will vary from property to property and on the number of years remaining on the lease. To this purpose, a surveyor/ valuer can assist in advising on the premium to offer the landlord.
The leaseholder will need to cover
- their own legal fees
- the landlord’s legal fees
- valuation fees
- as well as any stamp duty land tax if applicable.
Once section 42 notice has been served, the Landlord then has two months to respond. The options open to the landlord are:
- agree the terms proposed
- accept the leaseholder’s right but propose different terms including premium, or
- reject the claim
Landlords often respond by accepting the leaseholder’s right to extend the lease but rejecting the premium offered.
The next step is for negotiations to take place between the parties and hopefully, an agreement can be reached. However, if this is not possible the only option open to the leaseholder is to pursue a claim to the First Tier Tribunal. This will result in a delay in concluding the matter and incurs further costs. This is why it is preferable to reach an agreement that the leaseholder is happy with.
If and when the lease extension is agreed, the property value is likely to enhance as well as its saleability.
When looking to sell, the majority of lenders will require a lease for a certain number of years remaining before they are willing to lend. For example, some lenders require at least 80 years remaining on the lease.
Leaseholders with a low number of years remaining on their lease and looking to sell, often extend at the same time to make their property more marketable.
Leaseholders can agree with the buyer to have the benefit of the lease extension Section 42 notice assigned to the buyer. This way, they can sell without awaiting the extension process to complete and without the buyer having to wait 2 years before being able to extend.
There is also a less costly alternative in terms of legal costs for extending a lease, this is via the non-statutory/ informal route by negotiating directly with the landlord.
The non- statutory or informal route to extending your lease
This route may also mean the landlord is in a position to offer the leaseholder the ability to extend their lease for a lower premium than that required via the statutory route. In return, the Landlord may ask for increased ground rent and might offer the tenant a slightly shorter term.
This can be a better option for both parties if the leaseholder would struggle with the cost of a full statutory extension. However, any savings on the fees and negotiated reduction in premium will need to be weighed up with the leaseholder paying higher ground rent. So, informed advice is essential to ensure there is no adverse impact on the saleability of the property.
Advice for leaseholders
LDN Conveyancing can help leaseholders who are considering extending their lease, from weighing up the pros and cons of the statutory and non-statutory/informal approaches to help with negotiations with the landlord and finally to completion of the extension and registration at the land registry.
For a no-obligation quote and free and friendly advice when considering your options regarding a lease extension LDN Conveyancing are here to help.
https://www.ldn-conveyancing.com/ Tel: 020 8753 7800
Thank you, LDN Conveyancing, for this insightful article and for sponsoring the Meetings of West London Property Networking.