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An Informal Lease Extension – A Tailored Fit?

By Angela Alexiou, Solicitor at Bolt Burdon and Ibraheem Dulmeer, Legal Adviser with The Leasehold Advisory Service

June 2016

The process of leasehold enfranchisement provides a flat owner with the opportunity to extend the term of their lease. The legislation was introduced to balance the bargaining power between the Freeholder and the leaseholder. Historically, and prior to the leasehold reform, Freeholders could demand an extortionate premium or refuse a lease extension. There was no protection for a leaseholder to negotiate upon the terms or the premium of their lease extension.

Formal route

The Leasehold Reform Urban and Housing Development Act 1993 (“the Act”) provides a qualifying flat owner with a 90 year top up to their existing term and removes the ground rent.

Leases are a depreciating assets and extending one’s lease should be viewed as protecting an investment. Many leaseholders are unaware of the importance and the cost implications of extending a lease term which is approaching 80 years or below.

Best practice indicates that it would best be for a leaseholder to proceed with a statutory lease extension
(rather then negotiate informally), and to ensure a notice under the Act is served before the term falls below 80 years. The lower lease term coupled with the increase in the property value can result in a high premium being payable to extend a lease by a further 90 years and to remove the ground rent provision.

It is prudent to start a lease extension process by utilising the statutory procedure, assuming the leaseholder qualifies. This is because the service of the Notice under the Act freezes the valuation date known as the relevant date. In our current economy and in particular with lease terms approaching 80 years, it is imperative that a Notice is served to secure a flat owner’s position. The service of the Notice affords a flat owner with a greater degree of bargaining power.

Informal route

Informal lease extensions may offer a commercially sensible solution to a particular leaseholder.

Angela sets out a scenario with which she has recently dealt:

“I had a client whose lease had an unexpired term of 70 years. My client wanted to extend his lease and then sale the property. With the current lease term my client’s  sale market is restricted to cash buyers as many lenders will not lend when the unexpired lease term is lower than 74 years. I proceed to serve a Notice and after two months the Freeholder served a counter notice. Separately the Freeholder had offered an informal lease extension for a substantially lower premium. However, as it is usually the case, the Freeholder had included in the offer a rising ground rent. Upon receipt of this informal offer, I explained the terms to my client and also suggested that we could potentially re-negotiate on more favourable terms. For some leaseholders these informal negotiations can be beneficial as the leaseholders may ultimately pay a lower premium. However, care should be taken to ensure that the new ground rent provisions and any of the terms as negotiated would not affect the future marketability of the property. The increase of the number of years, the ground rent provisions and any modifications to the lease can be negotiated informally.”

Concluding remarks

To conclude, it is prudent to protect your investment by extending your leasehold term. A flat owner may wish to start the process using the statutory procedure. However in circumstances where the Freeholder makes an informal offer, these offers should be carefully explained to a flat owner and where possible negotiated and considered, to achieve the best commercial outcome.

Leaseholder have choice to extend their leases either by negotiation or under the law. This choice must be an informed choice by ensuring to obtain legal advice.

 

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LEASE is governed by a board, appointed as individuals by the Secretary of State for the Ministry of Housing, Communities & Local Government.

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