Lease Extensions During Conveyancing

Many prospective purchasers want to know if they can extend the lease during the conveyancing process as the seller is unlikely to want to do it for no gain. If the seller has owned the property for two years or more he can start the processby serving a Notice under s42 of the Leasehold Reform, Housing and Urban Develoment Act 1993 that will legally compel the landlord to extend the lease at the same time the property is being purchased.
However, it's not actually the lease that is extended at this time but the 'right' to be able to extend it at a later date that is secured.

The buyer pays the agreed price (to include the extension and not the price minus the cost of the extension) and once the seller has the cash from the sale, they pay the cost of that extension to the freeholder and the lease is extended. That way, the extension is paid for after the buyer acquires the property. The conveyancer should be able to advise fully on this complex process.

If the lease has between 80 and 82 years unexpired on its term, it is advisable to establish that the seller is actually in a position to serve the Notice on the freeholder (or intermediate landlord) to extend the lease after exchange. If so, the seller will firstly serve a Notice (a Deed of Assignment of the Benefit of the Notice) to the competent landlord. Certain clauses will then be inserted into the Sales Contract stating who will serve the Notice (the seller) along with when and who will pay the costs to cover the lease extension process (the buyer).

Note: this is not the same as a Deed of Assignment.

Valuation

Some landlords or  their agents will ask for money 'up front' for a valuation but this should be viewed with caution. Anecdotal evidence appears to suggest that the purchaser either does not get a copy of the valuation or they find that the terms of the new lease are for a shorter time than the entitlement and with an increased ground rent that would not be in accordance with the legislation.

Marriage Value

Sometimes the agent will give a rough estimate of what a lease extension will cost but fails to advise that if the lease has less than 80 years left on it then it is going to be more expensive than if it has more than 80 years left on it. This is because of what is known as 'marriage value' which subtracts the value of the property before a lease extension is granted from the value it could reach afterwards. The landlord's interest lays in the amount of ground rent he can expect to receive during the term of the lease but this is lost when an extension is granted. It is this loss of ground rent which is then added to this increased value figure. The 'marriage vaue' is then split between you, the leaseholder and the freeholder (as long as he is the superior landlord). The cost of a lease extension should always be less than the increase in value it creates, i.e. the increase in the value of the property will be more than the outlay.

Lack Of Disclosure

Leaseholders are often not very happy when they find out about marriage value after they have purchased because had they known about it sooner they could have factored it into their initial offer. They can if they wish hire a new solicitor and raise a formal complaint to the original solicitor who handled the conveyancing. If an agreement on compensation cannot be reached then the Law Society may be able to assist.

Completion

When the sale is complete then the sellers rights stated in the Notice served on the freeholder will be assigned to the new owner at the same time as the assignment of the lease itself, i.e. when the buyer takes ownership.

Note: There is no standard form for the Notice so specialist legal and valuation advice should be sought prior to service on the landlord.

The only way to be sure how much a lease extension will cost is to obtain your own valuation. If you serve the correct notice to the freeholder, the freeholder is obliged to grant an extension of 90 years. You propose the price you wish to pay in the s42 notice that you serve on the freeholder.