Lease Extensions: Formal (inside the1993 Act)

There are two approaches to obtaining a lease extension from the freeholder: by serving a formal statutory notice once the property has been owned two years or more (under s42 of the Leasehold Reform Housing and Urban Development Act 1993) or an informal request, often sought when the property has been owned less than two years (but not necessarily) and therefore falling outside the 1993 Act.

SERVING A FORMAL NOTICE

The serving of a s42 Notice of Claim on on the immediate landlord (i.e. the freeholder who will have the sufficient superior interest in the property to be able to grant it) is phase 1 of the extension process.

However it is important to remember that the freeholder is only ever obliged to grant the 90 years where a formal Notice is served.

Note: Whilst it is not a legal requirement to hire a solicitor to serve the required notice on the landlord, it is advisable to do so.

Contents of the s42 Notice

The notice must contain the following:

• The full name of the leaseholder and the address of the flat;
• Sufficient information about the flat to identify the property and the leaseholder to which the application relates;
• Details of the lease including its date of commencement and its terms;
• The premium proposed (offer price) for the new lease and or other amounts payable where there are intermediate leases;
• The terms that the leaseholder proposes for the new lease if different from the present lease;
• The name and address of the leaseholders’ representative if one has been appointed;
• Ground rent payable;
• The deadline by which the landlord must reply which, by law, is within 2 months of the date of the notice.

When a statutory notice is served the terms are restricted by the 1993 Act making negotiations quicker and simpler.

LEASE TERMS

The following information was sourced from the article 'When Does A Straightforward Lease Extension Become Less Straightforward?' written by Leasehold Life guest contributor Katie Cohen, Partner at Child & Child Solicitors.

Under s57 of the Leasehold Reform, Housing & Urban Development Act 1993 (terms on which a new lease is to be granted) a statutory lease extension is to be granted on terms as follows:

1. To be at a peppercorn ground rent (i.e. nil) for the entirety of the term of the new lease (i.e. the additional 90 years plus the present unexpired term)
2. To be on the same terms as the existing lease, subject to minor modifications and certain statutory exclusions and additions.
   (i)  Modifications – to take account of any alterations to the flat, or the building, since the grant of the existing leases (e.g. reference to gas lighting or coal stores), or to remedy a defect in the lease.
   (ii)  Exclusions – since the 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.
   (iii)  Additions – a requirement not to grant a sublease of sufficient length as to confer on the sublessee on the right to a new lease under the Act.
3. 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 and the payment of full compensation to the leaseholder for the full value of the remaining 90 years. The incusing of the landlord’s redevelopment right does not cause any difficulties in mortgaging the flat.

Whilst other terms contained in the existing lease remain the same, certain variations can be requested because s57 of the 1993 Act allows the amendment of clauses that render the existing lease as defective.
This is not the same as changing the terms in the lease because they will fall outside the statutory requirements and are therefore not permitted under the Act. Whilst they would be permitted under a voluntary (informal) lease extension it is important to remain aware that the inclusion of any additional recommendations might not be agreed by the leaseholder because they do not fall under the leasehold reform legislation.

VALUATION

There are 3 elements that comprise leasehold valuations: ground rent, loss of vacant possession at the end of the term and marriage value.The first two are payable in all lease extension claims, but the third is only payable if there are 80 years or less remaining on the lease term. If this is the case then the extension will be more expensive. Marriage value is the potential for increase in the value of the flat arising from the grant of the new lease. It is required that this 'profit' be split 50/50 between landlord and leaseholder.

Vaulation Considerations

Using a lease extension on my block as an example, there were three flats taken into consideration (although the third one was ignored):

1. The sales figure of a repossessed flat (the lowest potential value);
2. A smaller flat (82% smaller than the subject flat) with that difference being adjusted pro-rata to give its value at £97,250;
3. The third was one sold for considerably less than other flats of the same size and less than the repossessed flat. It was therefore ignored

The remaining sales values were averaged (to include the adjustment for the smaller flat) to arrive at a value of £84,950 for the subject flat which was 21% more than the repossessed flat.The value was reduced however because of the Act Rights which at this length of lease was around 8%. This gives an adjusted value of £78,150 which is 11% more than the repossessed flat and has considerable credence considering that a mortgagee in possession cannot serve a notice under the Act.

£78,150 was therefore taken as the value of the existing lease of the subject flat. Various graphs were used to calculate the value of the landlords reversion which range from 81.30% to 88.50%. The average of 84.15% was taken, giving a freehold reversion value of £92,700.

Other Parameters

The other parameters of a valuation are the capitalisation rate and the discount (deferrment) rate but the former was of little relevance due to the low ground rent.
The usual discount rate is 5% as per the Sportelli decision but in the case of Zuckerman v Calforth Estates in 2009, the Lands Tribunal determined a rate of 6% to reflect locality, obsolescence and potential management difficulties, all three of which can be theoritically applied here and so the 6% rate has been adopted.

The realistic figure for a lease extension was ultimately fairly represented by the sum of £9,072.

WHY EXTEND?

The main reasons for lease extensions is that leases lose their value as the lease term decreases. Mortgage lenders are also unwilling to lend on short leases and not all leaseholders will want (or be able) to take part in collective action such as buying the freehold. Lease extensions also reverse the property's loss of capital value and make it far more likely to reach it's true market value.

Leaseholders Costs

Under s60 of the 1993 Act, where a notice is given under s 42, the leaseholder is liable for the reasonable costs (of) and incidental (to):

1. Any investigation reasonably undertaken of the tenant’s right to a new lease;
2. Any valuation of the tenant’s flat obtained for the purpose of fixing the premium or any other amount payable by virtue of Schedule 13 in connection with the grant of a new lease under s56 and
3. The grant of a new lease under that section.