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 usually on 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 of less 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 two year 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 and time 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. In addition 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 appointed surveyor. 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 to tribunal is relatively small.