The lowdown on Lease Extensions

(Written by our Head of Conveyancing, Karen Healey) 

What is a Lease Extension?

Leases are granted for a specific period of time or “term”. Usually it becomes necessary for a Lease to be extended when it gets down to 82 years or less to run as the likely premium that is payable will be more if the Lease has 80 years or less to run as it will attract a further premium called “the marriage value”. This will make the Lease extension more expensive so it is wise to extend it prior to that time. Lenders require that the term of the Lease is 30 years plus the Mortgage term or some other term so it is important that your Lease has the appropriate length of term left to run.

Do I qualify for a Lease Extension?

To qualify for a Lease Extension, you must be a long leaseholder of a lease of more than 21 years to run and have owned the property for the last 2 years prior to the proposed extension. A shared ownership lease cannot be extended.

How can a Lease be extended?

There are two ways in which a Lease may be extended as follows:-

Direct Approach to the Landlord

This occurs when a leaseholder approaches the Landlord directly and asks to extend their Lease term. The Landlord then decides on a premium to be paid for the extension of the Lease. The Leaseholder will be expected to pay for any Landlord’s legal costs and disbursements and any Valuer’s costs in arriving at the premium. There may also be certain administration fees which the leaseholder will have to pay.

Advantages/Disadvantages of Direct Approach to Landlord

The Landlord often uses a direct approach as an opportunity to sneak in certain “improvements” to the Lease such as increases in ground rent. This is often the quicker but potentially more expensive way to extend the lease and in circumstances where there is a sale going through at the same time, it may be quicker to use this route to co-incide with the sale as the S42 route has built in timeframes that must be adhered to.

S42 Leasehold Reform Housing & Urban Development Act 1993 (as amended)

Under this route, a S42 notice must be served on the Landlord and any third party to the Lease. The Notice must state what the Leaseholder thinks the premium for the extension should be. The S42 notice must give the Landlord at least two months in which to respond. It is vital that the Notice is correct and served on the correct parties as if it is invalidated by incorrect information or insufficient notice then it will not be possible for another notice to be served for 1 year. The S42 route will add 90 years onto the existing term at a peppercorn (zero) ground rent.

Advantages/Disadvantages of using S42 approach for a Lease Extension

It is often not possible to update outdated lease terms by using this route. The Landlord may request that 10% of the premium suggested by the S42 notice or £250 (whichever is higher) is paid by the Leaseholder once the Landlord acknowledges receipt of the S42 notice. It may be more costly as there will be lawyer’s fees for the preparation and service of the S42 notice as well as for approval of the Lease Extension documentation. It can also be a slower route because of the built-in time limits for notice and counternotice by the Landlord. You will also be expected to pay not only your legal fees but the Landlord’s legal and valuation fees.

Lease Extension Valuation

It is important to ensure that you seek valuation advice from a suitably qualified Surveyor who has experience of valuing premiums for Lease Extensions. Failure to put a reasonable premium into a S42 Notice may invalidate the notice. You would also want reassurance that the premium being proposed by the Landlord is not unreasonable. The Surveyor may also act for you in negotiating with the Landlord’s valuer should the Landlord serve a Counternotice.

S42 Service of a Landlord’s Counternotice

The Landlord has two months in which to service a counternotice which runs from the date of the original S42 notice. This Counternotice may suggest an alternative premium (usually higher). It is then important to go back to your Valuer to ask for their assistance in negotiating with the Landlord’s valuer on the premium.

The negotiations on the valuation must take place within a reasonable time but there are more time limits to adhere to. If the negotiations do not go well or if there is a dispute, then either party can apply to the Tribunal no earlier than two months after the date of the Landlord’s Counternotice but no later than six months after the expiry of the date of the Landlord’s Counternotice. The Tribunal will hear evidence and make a decision as to the premium.

What happens if I have a mortgage over my property and want to extend my lease?

You will need to advise your Lender if this is the case and seek their permission. Most Lenders usually have a restriction on the Leasehold Title when you entered into the mortgage the mean that you cannot present any transactions to the Land Registry without their consent.

Also, the registration of the Lease Extension will have the effect of shutting down the existing Lease Title and opening a new one so the Lender will want their mortgage to transfer to the new Lease Title that is opened by the Land Registry. This is accomplished by a “Deed of Substituted Security” that the Lender will require to be entered into and presented for registration at the same time as the Lease Extension. Please note that your Lender may require you to pay for an administration fee in respect of seeking this consent.

The future for Lease Extensions?

The Government is looking to overhaul the lease extension law by the introduction of new  legislation which is currently going through Parliament. This is the Leasehold Reform (Ground Rent) Bill which proposes to set ground rents to zero once enacted. It is also proposed that there are reforms to the enfranchisement valuation procedure when extending leases and to abolish the marriage value which currently applies. It is also proposed that leaseholders of flats/houses will have the same right to extend their lease agreements as often as they wish at a zero ground rent for a term of 990 years. It is not yet known when this Bill will become law.

What happens next?

Once a premium figure has been arrived at then the Landlord instructs his legal advisors to draw up the form of Lease Extension and this is sent to the Leaseholder’s solicitors for approval. The draft will only be sent to the Leaseholder’s solicitors once the Leaseholder’s solicitors have given an undertaking to be responsible for the Landlord’s legal and valuation fees. A leaseholder’s solicitors can only give this undertaking once they have received the funds for the Landlord’s legal and valuer’s fees in their bank account as they will be obliged to pay it to the Landlord’s solicitors whether or not the Lease Extension is ultimately completed.

Completion/Registration of the Lease Extension

Once the final form of the Lease Extension is agreed then it signed by all parties to it and then the matter will be completed. It is vital that if there is a sale/purchase that the completion of the Lease Extension is synchronised with the completion of the sale/purchase. The premium and other costs and disbursements will be paid to the Landlord’s Solicitors and the Tenant’s signed copy of the Lease Extension is sent to the Landlord’s Solicitors and the Landlord’s Solicitors send that copy signed by the Landlord to the Leaseholder’s Solicitors. The Leaseholder’s solicitors will then apply to the Land Registry for registration of the Lease Extension.

Contact Karen Healey on 01243521740 or email karenhealey@owenkenny.co.uk