Do you need to extend your lease if you own a share of the freehold? How much does it cost to extend my lease? Do all the freehold owners need to consent?
We often get asked these questions when advising tenants about extending their leases.
If you are lucky enough to own a flat and a share of the freehold the good news is that the process of extending is relatively straightforward and the costs are fixed (and low).
The first step is to agree this with the co-owners. You cannot usually act alone however extending the lease will benefit everyone.
If your co-owners need convincing there are an number of very good reasons to extend your lease now and not wait to when they are selling or remortgaging when the pressure may well be on to resolve these issues.
The main reason people act is that they find that their lease is ‘short’.
Defining a ‘short’ lease is not an exact science – typically it means less than 80 years – but is driven by mortgage lenders instructions.
Many lenders ask their valuers to comment if the lease length has dropped below 80 years and they will not lend at all if the lease is too short – some buy-to-let lenders will not lend if the lease is below 85 years. This is because they will not take into account the share of the freehold when providing finance – either to you on a remortgage or, if you are selling, to your buyer on their mortgage – because they cannot easily take a mortgage on your share in the freehold. This can make the re-mortgage or selling process more complicated or longer than necessary because you need to extend the lease first.
Whilst we often find ourselves helping freeholders to quickly resolve these problems where one or more tenants in the block are selling (even if they have a separate lawyer for the sale) it does place undue pressure on the seller in particular as they suddenly become reliant on the goodwill of their neighbours to deal with matters without delay – it only takes one owner to take a holiday at the wrong time and the whole sale could collapse.
It is worth pointing out that it is no cheaper to wait until the sale is progressing before extending your lease because as indicated above we often act for owners who are selling using another lawyer for the sale process. This is because our fees are fixed and competitive and are often lower than the bolt on costs of selling lawyer who assumes they have a captive audience.
Even if your lease is not short it is still sensible to move as much value from the freehold into the leasehold interest in the flat especially if you hold the freehold in your personal names. This is because you cannot control your co-freeholders and if one was to become ‘absent’ it would be impossible for you to extend the lease without going through the complicated statutory procedure including Court proceedings and payment of a premium for the extension. This would defeat the object of owning a share in the freehold.
You may think it is an unlikely that one of the owners of the freehold would become absent but we have seen plenty of examples where it has happened and consequently the marketability or value of the other flats have been adversely affected.
The most common example is where the co-owners each own a share in the freehold personally however they fail or chose not to pass on their share on sale of the lease. They then move away and lose touch with the other owners. Sometimes this is forced upon owners if they are repossessed – the mortgage company has no right to transfer the share of the freehold so it is left with the old owner with the share of freehold. Again we have advised clients in situations where the repossessed former owner has demanded significant sums to hand over his share of the freehold many years down the line.
Even if your neighbouring co-freeholder is around he/she/they may not be willing to assist in extending your lease.
You may assume that when you purchased the freehold with them this guaranteed you a ‘free’ lease extension. This was the assumption (by one owner) in a case of Parkes v Wilkes  EWHC 1556 (Ch) where the two flat owners bought the freehold via collective enfranchisement. They signed a declaration of trust to hold the freehold in trust from themselves as tenants in common in 50:50 shares. After the purchase of the freehold one flat owner asked the other to grant them a 999-year lease extension. The second owner refused.
The matter went to Court and when the initial County Court hearing upheld the refusal it was appealed.
It was argued (quite sensibly) that the whole reason for buying the freehold was to get longer leases. The Court however did not agree.
Although the Court said they had the power to order such a lease extension they found there was no evidence to support that type of implied provision into the declaration of trust. Obviously the position would have been different if there was a written agreement between the parties – we often put this into the “Participation Agreement” at the beginning of the Collective Enfranchisement process or in a Declaration of Trust when you compete. Even correspondence between the parties before the freehold purchase would have assisted – a few emails confirming their intention. You can read the case here http://www.bailii.org/ew/cases/EWHC/Ch/2017/1556.html
Why would a neighbour be difficult? It may simply be that you have fallen out over an unrelated matter or perhaps they want to buy your flat on the cheap. Whatever the motivation in the absence of an express agreement on the point you should try to extend as early as possible after the purchase of the freehold. Whilst not every neighbour will take it to this extreme some may try and extract something from you (for example they may want that loft space you consider to be joint or their legal fees paid) if you leave this to a vulnerable time, for example when you are desperate to sell or remortgage.
Even if you get along with your current neighbours if they come to sell on then you may find you have problems with their buyer. Best advice is therefore to extend when you are getting along!
It is sensible to hold the freehold interest in a limited company using special provisions in the memorandum and articles of association linking the ownership of the freehold automatically to the ownership of the flats. This would enable the Directors of the company to transfer a share even if it was not dealt with by the outgoing tenant and so to avoid the situation on resale or repossession mentioned above. If this is not set up in your company articles it may be worth amending them because you can have the same problem as with an absent freeholder and a repossessed former owner described above.
The downside to this is that there are basic requirements to file formal returns and accounts at Companies House, even if they are dormant, at least once a year. This can be done easily on-line but the penalties for non compliance are relatively high and this can result in the company being struck off the Company Register and dissolved.
The costs of restoring a company to the register is expensive and can take time. If the company has been struck off for more than 6 years your cannot restore it.
This means that even if the freehold is held by a limited company it is still sensible to move the value from the freehold to the leasehold by granting a long lease to each of the tenants.
Modernise and Fix
In addition you can also take the opportunity to modernise or fix any minor defects in the leases to make the resale easier in the future to ensure that it complies with current requirements in particular those set down by the Council of Mortgage Lenders and Building Societies Association.
Often we find that leases need amending or tenants want to change leases in the following areas:
- ground rent – remove the need to pay ground rent by reducing it to a “peppercorn”.
- restrictions on sub-letting – removing historical restrictions or barriers to underletting the whole of your property on an assured shorthold tenancy (AST). Although these covenants may not be enforced in practice if you want a “buy to let” mortgage your lender may pick up on the restriction and refuse to lend until the provision is changed.
- changes to covenants on floor covering – a requirements for carpets in all areas to permit wooden flooring (with rugs or other suitable sound deadening) – although this can be controversial for some blocks.
- insertion of a landlord’s “enforcement covenant” – again this is a fix which makes little day to day difference but will assist on sale and refinance.
How is the lease extended?
Generally there are two options available in relation to the format of the new lease, which vary the costs payable:
- New Lease – this involves a complete rewrite of the terms of all the leases in the building. The cost of drafting a new lease would be higher but for most blocks this is not required. This would only normally be required if :
- the current leases are substantially defective in many respects; or
- the format of the lease differs throughout the building (they should be uniform in all key aspects)
- A deed of surrender and re-grant – this is a ‘short form’ of new lease which refers back to the majority of the terms of the existing lease and only amends the length of the term (normally to 999 years) and reduces the rent (again normally to a peppercorn). You can, if required, incorporate some minor amendment to the leases for example the addition a landlord’s enforcement covenant (a common defect). Most leases are extended in this way.
How can I tell what option we would need to use?
We will advise you on this when we look at the lease but if any of the flats in the building have been bought or sold recently, especially with a mortgage, then a deed of surrender and regrant is normally sufficient. This is because the solicitor who acted on the purchase would not have recommended the purchase of the flat with such defects or variations unless the lease was varied or indemnity insurance was put in place to cover the problem.
Of the many blocks of flats we have dealt with we have only recommended a new lease, as opposed to the surrender and regrant method, on a few occasions.
How much does it cost?
Typically the fees are fixed at £450 per flat plus VAT for a deed and surrender and regrant.
If there are a high number of flats in the building some economies of scale may apply for example on blocks with 10 or more flats we would charge £425 plus VAT if the leases were in a similar format. With very large blocks we often are able to put together information packs which can assist in discussions usually during an AGM. We also fix our costs for a period of years as it is unlikely in these cases that all flats are going to be extended at the same time.
Our costs will cover:
- a review the titles and leases in the block;
- recommendation of any changes required to the lease;
- drafting the new lease;
- obtaining consent from your mortgage lender (this is needed to transfer the mortgage from the old leasehold title to the new title);
- arranging for signature by all parties;
- dealing with formal completion, stamp duty and registration requirements; and
- storage of the deeds post registration.
In addition to the legal costs there will be a charge for any disbursements incurred (per property). This typically amounts to :
- £6 for obtaining office copies of the leasehold title plus shared cost of obtaining freehold title;
- £3 for obtaining office copies of the lease (only required if you cannot supply a copy of your flat lease and any variations to it); and
- £40 for registering the new lease at Land Registry.
In addition if you have a residential or buy to let lender they may charge an administration fee for consenting to this transaction (which can vary – many do not charge others charge up to £10585). It is rare for the charge to exceed £105.00 but this can happen for some more obscure lenders (such as Paragon (who charge £195) and CHL (who insist on outside lawyers who charge £400 plus VAT on top of the fee of £90 payable to this lender)). Commercial mortgages (linked to a portfolio) may have wider requirements including searches.
It is worth pointing out that our fees cover the cost of acting for both the landlord and each of the tenants. There is never usually a requirement to have separate representation for both parties – saving further costs.
Where we can help
We are specialists in dealing with these type of matters. If you require information about a particular aspect or just want to talk through the options call or email Mark Sadler on 01708 757575 email email@example.com
As a next step if you think you might want to use us we can circulate confirmation of our fees to you and any other owners in the block (usually by email) with a short one page questionnaire (typically in the format of the attached) – once this is completed and returned we can start the process immediately.
Lease Extensions – Share of Freehold – Short Lease – New Lease – Cost of Extending a lease with a share of freehold – Share of Freehold Extending Lease – 50% share in the freehold – Freehold Management Company Extending lease