Question

My co-freeholder does not wish for us both to extend our leases for no premium even though they are the same length. She says she has no interest in ever extending hers and thus wants me to get my own valuation which is clearly unnecessarily costly. What can I do in this situation?

Answer

Unfortunately whilst in the vast majority of instances leaseholders with a share of cover) it can take only one to make this unworkable.

In some cases the rebellious leaseholder will have a flat that is smaller and less valuable than the other flats in the block, and feels they can make a profit out of everyone paying everyone else to extend their leases. In reality the professional fees in this approach render the theory useless let alone any considerations relating to the time and stress of such a long and drawn out process.

In your instance if your neighbour can insist on you getting your own valuation and can also insist on you serving a formal notice. Whilst this is annoying at this moment in time if she ever wishes to extend in the future (or any other owner of that property for that matter) you are almost certain to be better off overall financially and can realise a healthy profit with their lease being shorter and property values likely to be higher.

Question

I spoke to my Freeholder to enquire the cost to extend my lease and he stated £15,000 to £20,000.

I’ve instructed a surveyor to value the premium and he said the cost would be £7,300 and suggested I make an initial offer of £6,200.  I have received a letter from the Freeholder rejecting this offer and asking me to telephone him.

Should I phone the Freeholder to discuss or should I instruct a solicitor and serve notice?

Answer

It is not uncommon for freeholders to demand somewhat over the odds in informal negotiations, as they are aware that lessees tend to be keen to avoid the accruing the professional fees which accompany perusing the statutory process. It does seem, however, like your freeholder may be rather over-egging the pudding, in this instance.

There is no harm in having a telephone conversation with the freeholder, if you feel confident of being able to stick to your guns. If, however, your freeholder is not willing to negotiate the premium, your only recourse will be to have your solicitor serve notice.

Once notice is served you will become liable for the freeholders reasonable legal costs and surveyor’s valuation fee. However, you will then have recourse to the First Tier Tribunal if your freeholder refuses to agree an acceptable premium. In reality, for a premium of this size the Tribunal appearance is unlikely, as the costs of proper representation would be prohibitively high for both sides. The threat alone of a possible application to the Tribunal will likely be enough to make your freeholder see sense, and reconsider his position.

Question

I own one of two flats in a Victorian conversion and also own a share of freehold with the other leaseholder. We are both on 73 year leases so I thought extending both at the same time would not be a problem. The other leaseholder is now saying that he wants a premium for my extension as he has no interest in extending his. What can I do?

Answer

In most normal and amicable circumstances leaseholders on identical lease lengths do not tend to worry about their deteriorating leases as at any given time both can be extended for the cost of some straightforward solicitors work. Unfortunately unless all parties to the freehold agree to do this you have no other option but to pay your other co-freeholder to extend your lease and bare all the costs in doing so. If he demands that this is done formally or asks for an unreasonable premium your costs will also extend those associated with serving a S42 notice.

On the positive side of the coin as a co-freeholder you will effectively be paying half of the premium to yourself and should any future leasehold owner of the other flat look to extend their lease you are likely to be in profit after receiving the proceeds of that extension.

Question

I need to extend my lease but also wish to consider buying the freehold with my neighbour who lives downstairs. Is it likely to cost a little more than an extension or would I be looking at paying a lot more?

Answer

The answer to this, as you have alluded to, can either be very little more or substantially more. The main difference between a lease extension and a freehold acquisition is that with the latter you need to consider the whole of the freehold entity as opposed to the smaller and singular leasehold demise of your respective flat.

The three most common areas that need to be considered are loft spaces, basements and the grounds of the building itself with the question to be asked being ‘what value could the freeholder expect to realise if these areas where to be developed’.

In most instances the front and rear gardens will be owned/demised to the flats in the building or be communally shared. If this is the case no additional compensation is due.

If the loft space is not demised to your top floor flat (and thus is demised to the freeholder) your surveyor will have to establish what potential profit could be realised from that your undertaking a loft conversion. If the owner of the ground floor flat could make a profit from digging down and creating habitable basement space the same principle would apply although this is only usually applicable in Prime Central London.

As you can see each of these instances needs to be individually valued and owing each individual situation such developments can be deemed infeasible and non profit making on the one hand or result in substantial compensation on the other.

Your initial conversation with a chartered leasehold valuation surveyor should be able to establish the likelihood of this before you go ahead and instruct them.

Question

I am buying a flat that has an 81 year lease. I am concerned that I will need to extend my lease, but solicitor tells me I will not have the right to do until I have owned the flat for two years. Is the cost of the extension likely to be a lot higher in two years than it is now?

Answer

Your solicitor is correct, insofar as in order to gain the statutory right to extend your lease under the Leasehold Reform, Housing and Urban Development Act 1993 (the Act), you need to have owned the property for two or more years.

It is very difficult to estimate what the cost of the lease extension will be in two years time, as it very much depends on what happens with property prices in the interim. However, all things being equal, it is likely that the extension will be more expensive, as not only will the lease be two years shorter, but critically, it will be below the 80 year point at which the legislation dictates you must pay marriage value as part of the premium.

Marriage value is the difference in the aggregate value of the freehold and leasehold interests before and after the extension is enacted. Under the Act a 50% share of this increase in value is payable to the freeholder where the unexpired term of the lease is below 80 years.

However, it may be possible to proceed with the benefit of the statutory right to extend. If the vendor is eligible to extend the lease (has owned the property for two or more years and meets the other criteria) he or she can serve notice under Section 42 of the Act, and assign the notice to you on completion of the sale. Notice is usually served in-between exchange of contracts and completion of the sale. In this way, it is possible to circumvent the two year requirement, and proceed with the statutory right to extend you lease immediately following your purchase of the property.

Do I need to make a Tribunal application?

by The Chartered Surveyor

Question

I am part way through the lease extension process (which has been dragging on for some time) and my solicitor has advised me to make a Tribunal application. I do not wish to incur the cost of such an appearance but have been told it is necessary. Is this the case?

Answer

Tribunal appearances in any scenario are always the option of last resort. The tone of your email suggests that both your solicitor and surveyor have not been at their best in communicating the reasons behind the need to make an application but I’ll try and have a guess at the likely reasons.

The most obvious stems from the period of time you have to complete the entire extension process which is 6 months post counter notice. If this time period elapses and you have not made an application, then the process is void and you will have to serve a new notice, probably have a new valuation and cover the other side’s costs to date. Applications made to avoid this are therefore often referred to as ‘protective’.

The other likely reason could be that the other side is non responsive in the negotiation process or is simply holding out for an overly high and unfair figure. In this instance the threat of going to Tribunal, which will be expensive for both sides, is often enough to encourage a swift settlement.

Question

I want to sell my flat in Acton, but it has a short lease, with approximately 65 years left. I have looked into extending my lease, but I understand this can take months and I don’t want to wait that long before I put my flat on the market. Is it possible to sell my flat with its current short lease or would I be better off extending before selling?

Answer

Unfortunately the length of your lease is likely to make your property more difficult to sell. With leases below 70 years unexpired mortgageability can be an issue. There are a number of mortgage lenders who are willing to lend on a 65 year lease, but many wont, and this could cause financing difficulties for your buyer. Inevitably, this is going to have an impact on the sale price of your flat.

Furthermore, it is likely that the buyer will want to extend the lease. This means that he or she will have to finance not only the original purchase, but also the premium payable for extension. Coupled with financing issues, the buyer will also be faced with some uncertainty as to the costs involved, it often being difficult to estimate with any precision the premium that will be agreed and the professional fees that will be incurred in advance of the fact. These considerations will likely be enough to put off all but the most foolhardy of purchasers.

At 65 years unexpired, your lease is far from unsaleable. However, to the get the best price for your property, it needs to appeal to as wide a range of purchasers as possible. If you are able to extend your lease before putting your property in the market the flat will be a much more attractive proposition to your prospective buyer.  

Question

I need to extend my lease and have approached my freeholder. He tells me that I have to pay for his surveyor’s valuation before he tells me what it will cost. Is this right?

Answer

As with so many leasehold reform questions – the short answer is ‘no’ with a ‘but’, and the long answer is ‘yes’ with a ‘however’.

As a leaseholder you have the right to a new lease with a term of 90 years in addition to your current unexpired term, and with a new ‘peppercorn’ ground rent. As you are aware, you will have to compensate the freeholder by way of paying a premium.

Technically, to initiate the process, you need to have your solicitor serve a notice on the freeholder under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993. At this stage, you will become liable for the freeholder’s reasonable solicitor’s fees and the cost of his valuation. The notice needs to be accompanied by a suggested premium. To this end, you ought to have your own surveyor value the premium in the first instance.  

This is typically an adversarial process – your surveyor will represent your interests (try to get the lowest premium) and the freeholder’s surveyor will represent his (try to get the highest premium). If the two surveyors, following negotiation, cannot agree the premium you have the option of referring the case to the First Tier Tribunal for determination.

Make no mistake, while you might be paying the fee, unless explicitly stated otherwise, the freeholder’s surveyor’s duty of care is to the freeholder – not you! Furthermore if you have not served notice and followed the correct procedures you will have no right of redress to the Tribunal, and will have no option but to serve notice and restart the process (potentially becoming liable for a new valuation by the freeholder’s surveyor as of the notice date) should you consider the freeholder’s surveyor’s  suggested premium unjust.

My view is that, unless the freeholder is willing to agree to a jointly instructed surveyor to assess the premium on a strictly impartial basis, you should not agree to pay any costs in advance of serving notice and following the statutory procedure.

Question

I recently received a notice from my tenants and it appears that the majority wish to join together and purchase the freehold from me. I would personally prefer not to do this as I see this as a long term investment. Can I simply refuse their offer?

Answer

Under the Leasehold Reform, Housing and Urban Development Act 1993 the lessees/tenants of your block do have the right to compel you to sell them the freehold subject to provisions and parameters. The first thing I would recommend is to pass on a copy of the notice to your solicitor and have him review it thoroughly.

There are certain technicalities to serving a notice and failing to follow just one of them can invalidate it. One of the most common discrepancies is that the notice is not signed by the registered lessee but third party such as a managing agent or relative. Also, if a company is the named owner on a lease, the director’s signature will need to be witnessed by their secretary or suitable person.  The Act also states that the date for which the counter-notice must be served should be for a period of no less than 2 months and critically that copies of the notice should be served on any third party to the lease.

Ultimately these area issues that an experienced solicitor should be fully aware of and the chances are that your notice was drafted by such a person and is therefore perfectly valid. If this turns out to be the case I would concede the fact that you will be forced to sell the freehold and instruct a leasehold surveyor to produce his own valuation to include in the counter-notice. The Act does serve the purpose of ensuring a reasonable premium is paid to you so with the correct professional help and advice you should at least be compensated with an appropriate sum.

From a strict valuation point of view there is little or no difference in value when comparing a property with a newly extended lease and that same property with a share of freehold. When you extend your lease under the Leasehold Reform, Housing and Urban Development Act 1993 you actually acquire a new lease equivalent to it existing length plus a further 90 years. The ground rent you pay also reverts to zero.

The calculation for each individual flat is also relatively the same in comparison, the main consideration would be if say, only 12 of the 16 decided to participate in the freehold purchase, the 12 would have to cover the premiums of the non-participating 4 flats.

The reason for this is that the Act states that a concept called ‘marriage value’ is applied when a lease drops below the critical mark of 80 years. A flat with a long lease or share of freehold is worth more than one with a short lease and this difference/increase in value is shared equally between the freeholder and the lessee(s). So if for example each flat was worth £300,000 with a long lease and £285,000 with a short lease, the difference of £15,000 results in a £7,500 increase in the premium payable to the leaseholder. Above 80 years this would not be a consideration.

Either way you and your fellow residents wish to proceed , I would recommend that you act promptly to ensure that those involved extend or enfranchise before all of the all important marriage value can be applied.