Leasehold Extension - Valuation
An outline of the valuation principles to determine the price for extending a lease of a flat under the Leasehold Reform Housing and Urban Development Act 1993.
By Angela Alexiou of YVA Solicitors LLP, Matthew Price of Peter Barry Surveyors, and Ibraheem Dulmeer of the Leasehold Advisory Service
The Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”) provides leaseholders with the right to extend their lease; subject to certain qualifying criteria being met.
In brief, the Act provides the leaseholder with a right to extend the lease term by a further 90 years and extinguishes the ground rent. This is known as a statutory lease extension. The right is one of compulsion, as historically a Freeholder could demand a premium at its discretion or refuse a lease extension carte blanche.
Unlike a Freehold asset which grants ownership for an infinite period, a leasehold asset is an ownership for a defined number of years. Over the course of time as those years reduce, so does the value of the Leasehold property. Furthermore, as the term of the lease gets shorter, the premium payable for the extension increases. Therefore a lease is often described as a depreciating asset.
For the purposes of this article we are giving you the reader 12 good rules pertaining to the lease extension process. (Almost like the 12 good rules that were framed and displayed in many taverns in the 18th century and derived from a broadside showing a rough-cut of the execution of Charles I).
- Check the term of years left on your lease.Warning! Please do not become complacent if you have a lease term over 80 years because you are fortunate. Now instead of putting away your lease and forgetting about the issue you should take the opportunity to at least get advice on the benefits of extending your lease using the Act. The effect is that you will pay a premium to obtain an additional 90 years to the existing term and the ground rent is reduced to a peppercorn. A lease term above 80 years does not attract marriage value.
- First read up on the basics of qualifying. Then contact a surveyor and solicitor who specialise in Leasehold Enfranchisement. The solicitor shall investigate whether you and the building qualify pursuant to the Act in the first instance and the surveyor shall provide an opinion on the likely premium to be paid for a lease extension. The surveyor will also provide a range to your premium, a lower premium that should be inserted into the section 42 Notice to allow room for negotiations.Surveyor’s Tip: The Act states that the leaseholder’s figure stated in the section 42 Notice has to be realistic. A well-known elephant test may be applied as to whether a figure is realistic. This may be difficult to describe but you know when you see an unrealistic figure. Further to case law the test now would be a “genuine opening offer” i.e. a bona fide offer. Notably, the surveyor should be able to justify the valuation for the notice figure if it came to in the Tribunal.
- The solicitor shall prepare the section 42 Notice which initiates the claim. To assist the solicitor, you should forward your most recent ground rent and service charge demands, provide details of any managing agent and any further information you have in relation to the Freeholder’s address for service.
- Once a valid section 42 Notice is served a strict timetable is triggered. Instructing specialist advisers will mean your interest is safeguarded.
- It is likely that a landlord will request payment of the statutory deposit once the notice is served. This will be either 10% of the premium quoted in your initial notice or £250, whichever is greater.Practical tip: Good finance management is important here. Upon receipt of your surveyor’s report you should discuss the amount to be set aside to cover the statutory deposit, and even consider paying into your solicitor’s client account prior to service of the Notice. The reason being is that upon receipt of the request for the statutory deposit, your solicitor has a period of 14 days to make the payment to the Freeholder’s solicitor to hold the deposit as stakeholder. This may need careful consideration if the quoted premium is high as you may need to have the sum readily available from the outset. Please note the deposit is offset on completion.
- It is also likely that the landlord’s surveyor will require access to inspect the property for the purposes of completing their own valuation report. You should bear this in mind if the property is tenanted and perhaps discuss this with your tenant from the outset that on notice you will advise the tenant to grant access.Surveyor’s tip: Further to gaining access many Leaseholders ask if they should delay works to their property until after the Freeholder’s surveyor has inspected. In short, the answer to this question is no. The valuation principles for a lease extension (and enfranchisement for that matter) is unique in that the Valuer assumes that both the Leaseholder and Freeholder have complied with their respective obligations in the lease, which extends to internal and external maintenance. The Valuer therefore assumes that the property is in what is commonly referred to as “lease maintained condition”, with improvements disregarded, so do not be alarmed when your surveyor’s inspection takes 10-15 minutes rather than a full hour!
- Once two months have lapsed from the date of service of the section 42 Notice you should receive a Counter Notice from the landlord. If the landlord fails to serve a Counter Notice, the consequence is that the extension will be granted on the terms set out in your notice (i.e. potentially for the lower premium).
- The landlord may offer an informal deal alongside the Counter Notice. This will need some careful consideration, but for some leaseholders may offer the more attractive option, but advice should always be sought before making any decisions.
- Upon receipt of the Counter Notice your surveyor will typically begin negotiations. There is a two month period, the statutory negotiation period, whereby the surveyors try to reach an agreement. Surveyor’s tip: Your surveyor’s report would have commented on lower, realistic and higher range figures.
- Once the two month negotiation period is complete, your solicitor will reassess the progress being made between the surveyors and consider making an application to the First-tier Tribunal (Property Chamber) (the Tribunal). If the surveyors are making some progress it is usual to allow further time to enable further discussions, however an application to the Tribunal must be made at least two months from, but within six months of the date of the service of the Counter Notice or the Notice will be deemed withdrawn. In other words, you must allow two months to lapse (statutory negotiation period) before having a further four months to make an application to the Tribunal. The timetable in leasehold enfranchisement is very strict and it is imperative to ensure the deadlines are not missed.
- Once the Premium has either been agreed or determined by the Tribunal, hopefully the latter will prove unnecessary, the solicitors would agree the form of the new lease and proceed to complete the lease extension.Tip: Once the premium is agreed and no changes to the terms of the lease are proposed, terms of acquisition are agreed at this point and you have four months to complete the lease extension. This is a strict deadline and failure to complete within this timescale would result in a deemed withdrawal (in the absence of an application to Court). We mentioned above the importance of finance management. If you are remortgaging it is important your solicitor and broker communicate regarding the timing of making an application for the remortgage and the drawdown of funds as you need to ensure the money is readily available to complete within the four months deadline.
- A completion date will be agreed for the lease extension. The property register at the Land Registry will be amended and you would have successfully completed the process and protected and added value to your leasehold interest.