As with anything connected with the law it is more complicated than you first think. It also helps to understand the jargon. In this article I refer to ‘Landlord’ and ‘Tenant’ quite a bit. The Landlord is usually the freehold owner of the building in which you have the flat, sometimes also referred to as the Lessor in your lease, and Tenant is you, the flat owner. The Tenant may also be referred to as a Lessee in the lease. There can be more complicated leasehold arrangements in place in your lease such as the involvement of a managing agent (residents owned or otherwise) who deal with the service charges or superior landlord but generally this does not affect the broad advice below but may complicate the legal arrangements.
This article also only covers the extension of a lease in a flat. Not a house.
Why do I need to extend the lease of my flat?
If you own a leasehold property the length of the lease will effect the value and marketability of the lease. These are both directly linked to the requirements of mortgage lenders (even though you and your buyer may not require a mortgage) because they set the market standard for leases when setting out mortgage instructions. This is both in relation to valuation and legal issues. These instructions change over time. You can view them on the UK Finance (formally CML Lenders Handbook) website https://www.cml.org.uk).
Broadly if your lease is “short” it will cause a problem, usually the buyer may not been keen to buy or seek to reduce the price or a lender may not lend as much or at all.
What is a “short lease” in the context of a leasehold flat?
Leases of less than 85 years can cause a problem because now some buy to let lenders insist on this as a minimum term at the point a mortgage is granted.
The majority of lenders are looking for less, typically 70 years although the instructions from lenders vary considerably and some lenders will still accept leases with 50 years remaining – see https://www.cml.org.uk/lenders-handbook/englandandwales/question-list/1846/
However the best advice is to aim for the point where the majority of lenders will accept the lease. It appears at the moment to be at least 75 years. Anything below this could be considered short.
Separately from the lenders instructions there are other reasons to extend the lease before it drops below 80 years. This is a result of the calculation (see further below) on the Statutory Lease extension process being more expensive if the lease is below 80 years when you serve the statutory notice. Because you need to have owned the flat for 2 years to qualify for the statutory lease extension process then, if you are buying, you need to consider this at 82 years remaining (unless you take some specific steps when purchasing to get the seller to serve a notice and take an assignment of that notice).
This is all very complicated but broadly I would say a lease of 90 years plus should be fine to resell without issue but a lot depends on your plans for the property in the medium and long term whether you should take action now anyway.
For many people this is not a pressing issue. Leases granted for say 125 years in 2010 will clearly have a long period left on them. Any lease owner with over 100 years remaining would not normally want to invest in a lease extension (unless there is a high or escalating ground rent).
On the basis your lease is short (90 years or less) or has a high or escalating ground rent then you may want to read on.
How can I extend my lease?
Simply the Landlord and Tenant need to agree to do this. The key problem is usually the “premium” (lawyer jargon for the price) to be paid to the Landlord for the lease extension. If you cannot agree then statute (the law) may give you a right to extend whether or not the Landlord agrees.
Could I get a ‘free’ lease extension?
First you need to establish what kind of tenant you are.
If you are a Tenant with a “share of freehold” then you may be able to extend for free. A share of freehold either means your name is on the freehold title with other flat owners (generally only applicable to buildings with up to four flats) or that you own a share in a company that owns the freehold (not confusingly simply a share in a residents management company as they may just have management control but in some cases they may own the freehold as well) See further http://www.ker.co.uk/what-do-lenders-consider-to-be-a-short-lease/
You will still need to extend the lease with a share of freehold (as any mortgage lender cannot put their mortgage on the freehold share) but often this just means organising this legally. Generally if this is the case you will not need to read further on this article but see http://www.ker.co.uk/how-to-extend-your-lease-if-you-own-a-share-of-the-freehold/
However the majority of Tenants will have a third party Landlord (i.e. not you or a landlord in which you own a share). The bad news is that you are likely to have to pay for the lease extension but how much you will be required to pay can vary considerably.
Lease Extension Calculators and Establishing an Estimated Budget for the Lease Extension
There are plenty of Lease Extension Calculators our there. Many however are based on the Lease Advice.org website calculator which is linked here https://www.lease-advice.org/calculator/ . I use this frequently as a starting point for discussions with prospective clients but please note the disclaimers and limitations on the use. This gives a rough guide to the statutory lease extension cost but does not deal with legal fees and complicated situations.
Broadly it gives you a rough guide to the premium payable. Add to this a budget of say £5000 for fees (legal and survey fees + VAT for both you and the landlord). This total is a helpful figure to have in mind when considering how you will fund it.
Bear in mind the calculator does not deal with escalating ground rents (rents which increase over time for example doubling every 25 years of the lease term) or very short leases (generally under 50 years). But if you play around with the figures you can see the potential range even for example your flat may be worth £50,000 more that you estimate it is or if the rent increases put the average rent over the whole term. Often this results in relatively small changes to the final premium.
This ballpark figure will help you negotiate because it gives you a idea of where you can start but do not discount the idea of a more formal valuation at this stage also – not every valuer can do this but we can recommend one or two who can. Remember you will want to use this valuer for negotiations and potentially attending at the Property Tribunal so there is no point starting on the wrong foot here. This may be especially important if the amount payable is very high or the matter is complex (short lease / high rents).
Another very useful source of information for the premium cost can the title deeds held at Land Registry. In large blocks we can obtain copies of any lease extension deeds which have been carried out in the last few years which can give (provided the flats in the building are similar in size/value to yours) an indication of what others have paid. This is very useful. If the Landlord has just achieved a lease extension premium on another flat which is less that you are offering then it will be a hard negotiation.
Everyone talks abut extending before 80 years – why?
Simply because the way the statutory compensation is calculated changes when the lease drops below 80 years. Something called “marriage value” is included in the calculation. It will be more expensive but not always that significantly so – again if you play around with the lease extension calculator above you can see the difference it makes if your lease is over and under 80 years. Clearly you want to avoid paying this extra money and the answer is to simply extend before the 80 years is up.
What if I cannot afford the Lease Extension cost?
Many lenders will advance further funds provided the lease is being extended because as noted above it will improve the security value over which they hold the property.
If you are not in a financial position to borrow more money and do not have savings then the only way to deal with this is to try and juggle the lease extension with the sale of the flat. This is very difficult to do with a statutory lease extension process because of the timescales involved however it can be done more easily with an agreed lease extension. If the landlord agrees a premium effectively we can complete the lease extension on the same day as a sale and direct that some of the sale proceeds are used to complete the lease extension. This is still a tricky process but we have achieved this many times for clients.
Another alternative (which can by used by perspective buyers as well especially if the lease is between 80 and 82 years) is to start the statutory lease extension process for a perspective buyer by serving a notice. This means you still have to be a qualifying tenant (owned for two years or the executor of a deceased owner who previously qualified) but the initial notice can be served between exchange and completion and the benefit of the notice assigned to the buyer.
Again this is tricky because there are specific issues about assignment and service which need to be considered carefully but this does provide a route to move matters forward. Again to convince a buyer this is a sensible route you should invest in a good quality valuation so that the buyer is confident of the price that the lease extension will be acquired for. You often see this option being used for very short leases being sold at auction. Again we have advised clients successfully on these types of auction sales.
Informal Lease Extensions
Early Negotiating Tactics
Ask the Landlord
Before you go down the statutory extension route asking the Landlord is I think an obvious and important first step. However many websites / articles caution against “agreed lease extensions” where you have negotiated with the Landlord and not gone through the statutory route. Some call these types of lease extension toxic. I disagree because unless you ask you do not get. If you get an offer you can consider this option.
I often advise my clients to make that initial approach direct rather than through my firm because an informal approach may get better results especially if you can talk directly to the landlord. He/she may be more willing to do a deal with you. If you approach with a lawyer’s letter often the immediate response is to engage your own lawyer.
Further these offers are not binding until completed so you can negotiate relatively freely. If you are worried negotiate “Subject to Formal Lease” or similar. Ultimately if you don’t like the offer (or get none) you can move to the statutory lease extension basis – there is little lost here unless time is of the essence for example the lease has 80 years and a few months remaining.
What to ask for?
You are going to want the Landlord to give you a 90 year extension (90 years on top of your existing unexpired lease term) at a peppercorn rent (nil) the same as you would do for a statutory extension.
In addition to the Premium (price payable) you will want to nail down:
- The length of the new lease – they landlord may often counter offer with a shorter term of 99 years or 125 years in total;
- The new ground rent – again this will be a counter offer to the peppercorn rent;
- How much their lawyers will charge (because if it is agreed the lawyer can quote a fixed cost – even the most expensive lawyers should not really be quoting more than £1000 plus VAT for this but push for £6-700 plus VAT)
- If there is a managing agent or surveyor negotiating on behalf of the landlord (bear in mind they may in fact be the landlord wearing a different hat) they may also want a “administration fee” for their time;
- that there are no other significant changes to the lease terms ; and
- a time scale for formal completion of the lease extension. This may be a few months. Try to resist deadlines especially if you need to raise finance to extend the lease or try for 6 months.
Consider Escalating Ground Rents / Shorter Extensions
As I said above many websites advise against agreeing lease extensions with landlords because under the statutory route you get an extra 90 years on top of the current term i.e. if the lease is 70 year at present this will mean the lease will increase to 160 years and the ground rent payable under your lease will reduce to nil (a peppercorn rent).
Clearly the Landlord may be interested in offering a shorter lease and keeping or enhancing the current ground rent. A Landlord could typically offer a lease extension back up to 99 years and a ground rent of £250 per year increasing every 25 years for example. Often the offer will be slightly less than the statutory extension premium noted on the calculator. This means you pay less cash now but more over the lifetime of the lease (because of the higher rent and the need for another lease extension more quickly).
But this is not necessarily such a bad deal for you (as opposed to future owners of the flat) if you intend to extend to sell immediately because this will not really cause a problem on resale (provided the ground rent is no more than 1% of the value of the property and the rent does not double say more than once every 20-25 years or is a RPI (Retail Price Index) increase). You can even use this tactic to decrease the amount of cash you pay now as the premium even if the Landlord does not offer this by putting this forward as a counter offer.
Clearly this is not so attractive if you intend to keep the flat long term because of course the lease will need extending again in 20 years or so if 99 years and the increased ground rent payments will make the lease extension in the future more expensive. As you can see from the lease extension calculator even a very long lease of 150 years with a £250 ground rent will cost £5000 or so to extend and remove the ground rent. Nonetheless some clients would rather take the short term view of paying less cash now which is their choice.
Consider the “type” of Landlord you are dealing with
We constantly come across offers by Landlords which are seemingly on or less than market value without the need for the statutory route.
This is particularly true of one off landlords e.g. someone who holds the freehold for historical reasons or more “traditional” landlords e.g. developers who have held the freehold since the 1960s. These types of landlord may be more open to a negations or will offer a reasonable figure. Sometimes it is not helpful to reveal what you think the cost of lease extension will be from the steps you have taken above. Let them offer first.
Small landlords, especially individuals may also be sensitive to tax. Due to Captial Gains Tax (CGT) allowances (£11,100 in 2017) being annual sometimes completion before or after 5th April may mean that they pay little or no tax on the lease extension. They may agree to deals if they are reminded they will not pay tax on the gain.
Local authority and Housing Association landlord’s are another category. This will be a growing area because of course the majority of tenants obtain Right to Buy leases which are invariably granted for a term of 125 years. Those leases granted in the 1980s and 1990s are now coming to a level where a lease extension is sensible. Although slow and bureaucratic and often requiring a formal statutory process to get them moving they tend to be fair in their assessments of the premium and clearly have not got an agenda.
There are also a group of landlords who may be more difficult to deal with. This new breed of ground rent investors often acquire multiple freehold ground rent investment from developers and the like. They are investors and hence will seek to achieve the highest price – some simply refuse to negotiate outside the statutory lease process (and are just as difficult when commenced) or provide barriers to a negotiated settlement such as payment of their valuation fees up front or quote exorbitant premiums for the lease extension and include escalating ground rent provisions however they too can offer acceptable deals dependent on your circumstances. You may find that the statutory route is the only way forward here but some will negotiate provided you pay their valuation fees up front.
Clearly you cannot negotiate with an absent landlord however it is worth trying to trace them because even if you go down the statutory lease extension route (you can ask the Court for a “vesting order” to effectively dispense with the signature of that tenant) you will first need to convince the Court that you have made thorough investigations and provided evidence of this to the Court before they will consider an order. Even if the landlord is still absent and a vesting order is granted it is not a free process and any payment for the Premium is still paid into Court. Therefore making an effort to trace a landlord is still a sensible step. It may be simply a case of obtaining a copy of the freehold title and writing to the Landlord at the address on the title register. It may be more difficult. If you cannot use online search companies such as 192.com we can engage more sophisticated tracing agents to help in the process but of course they will charge.
Don’t reveal if you are selling or need the extension for a remortgage.
This will give the Landlord an immediate advantage in any negotiations because they will know that you have time against you. Because a statutory lease extension takes 6-12 months you will not have time to go down that route. It may however be difficult to keep this from the landlord if you intend to use the sale proceeds or remortgage to pay for the lease extension because you need other information from the landlord for those processes but if you can progress the lease extension before the sale do this and don’t put the property on the market until the deal is completed.
Think About Fees
A factor often overlooked in early negotiations is the fees. Landlord’s are not silly and will see the benefit of a quick deal if incentivised. With low value lease extensions you may be able to factor in the potential costs of the process as they tend to be fixed. If you serve a notice under the statutory lease extension process then you immediately become responsible for certain elements of the landlord’s legal and surveying fees. For example you may pay £1200 towards the landlord’s legal costs and £700 to his surveying costs for going down the statutory route. This will be on top of your own legal and valuation costs which may be a similar amount. If you agree a fixed price early on you can avoid these costs to a greater degree (for example we can deal with an agreed lease extension for a fixed cost of £650 plus VAT) – the landlord’s costs should be a similar amount – this leaves around £2,000 or so in potentially saved costs to add to an initial offer. You can make it clear that the offer is made to avoid those costs. The obvious benefit to the Landlord is that he, not his lawyer/surveyor, receives that extra money.
Timing and Certainty
A negotiated settlement is usually quicker. The statutory route can take 6 – 12 months so factor this in if you have a need to remortgage or sell in the short term (although you can also consider selling and assigning the benefit of any notice – see below). Also the statutory route is a bit more uncertain in terms of costs. This is because the landlord may deal with things in different ways – some do not negotiate at all until you have applied for a final hearing date at the Property Tribunal. This means maximum costs will be incurred. A early settlement may cost more initially but the cost is known and the total expenditure fixed.
Review Any Offers
If an offer is made then you will then need to decide what professional advice you take. I accept there is little point taking advice from a valuer for a lease extension which is only a few thousand pounts but as the premium increases there may be value in taking professional advice at this point. A desktop calculation from a RICS sureveyor may give you the comfort you need to move forward. As these are complex calcuations this is not something a normal valuer or estate agent can really help you with. A lawyer cannot give valuation advice.
If you agree a deal – What to do next
If you accept an offer then generally you will need to engage a lawyer to deal with the new lease agreement. We deal with this stage for £650 plus VAT and disbursements (generally around £60) unless SDLT is payable. This may apply to lease extensions over £40,000/£125,000. There may also be a fee charged by your lender to consent to this arrangement. This may be nothing but some lenders charge a fee of up to £100. There are a couple of other lenders which charge much more (Paragon) or insist that their lawyers oversee the process (CHL).
At that point we can contact the Landlord’s lawyer and progress the matter. Generally they will want an undertaking to cover their costs whether or not the matter proceeds so you are effectively asked to pay their costs in full in advance. You need to make sure therefore you are in a position to proceed within the timescale set out by their Landlord in their final offer.
What if you cannot agree?
If negotiations break down or do not get started then you will probably want to progress a statutory lease extension. The basic procedure, template section 42 notice and a lease extension costs guide can be found in our article on http://Statutory Lease Extensions – Section 42 Notice
Lease extensions and the negotiations surrounding can be tricky. It takes a team effort between the tenant, the lawyer and the surveyor. We can help with both negotiated deals and statutory lease extensions from a legal perspective.
If you want more information on our services or just want to chat through some issues please contact Mark Sadler, Solicitor on 01708 757575 or email firstname.lastname@example.org
Please bear in mind this is just a general guide. It is not a statement of the law and you should take professional advice before starting on this process.