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.

Question

My freeholder has written to me with an offer to extend my lease to 99 years, which currently stands at 79 years. How do I know if this offer is in my best interests?

Answer

It is not a coincidence that your freeholder has chosen to write to you at this time. The cost of extending your lease once it drops below 80 years increases substantially due to what is referred to as marriage value. This figure is based on the fact that your property will increase in value following the freeholder granting you a new lease under the terms of The Leasehold Reform, Housing and Urban Development Act 1993. From a valuation point of view it is stated that this increase is shared equally between yourselves and the freeholder.

Now that your lease has fallen below this critical level, the freeholder is in a strong position to offer you an extension outside of the Act, which your case is to 99 years. Despite having not seen the details I would be very surprised if the offer did not include a provision for increased ground rent which would have provisions to increase at the end of set terms (usually every 33 years).

Seen as your freeholder is likely to have been advised on how much he would be entitled to if you chose to acquire a new lease under the mechanisms of the Act, the offer he has put forward will certainly in the long term be far favourable to him than you. Not only under the Act would your new lease be equal to its existing length plus 90 years, your ground rent would also be at a peppercorn rate or zero.
There are some circumstances where extending outside of the Act are suitable; where you require a quick sale for instance. In your scenario I would recommend that you instruct an experienced leaseholder surveyor to produce a valuation under the Act and have him review the two opposing figures.

by The Chartered Surveyor

Question

My husband and I are looking to purchase a property in W2. It is 640 sq ft two bed flat in a mansion block. The purchase price is £485k and the lease is just over 70 yrs. We are told ground rent is £40 pa although the land registry title docs state this increases to £120, we are unclear whether this has happened yet. We would like to establish (1) what the likely premium would be for the lease renewal and (2) what the likely increase in property value would be once the lease was renewed.

Answer

Under the terms of The Leasehold Reform, Housing and Urban Development Act 1993, you would be entitled to a new lease with a length equal to your remaining 70 or so years plus and additional 90. This is a slight technicality in that you don’t actually extend your lease, yet in reality the result is the same. The lease would also be at a peppercorn ground rent i.e. nominal.

At a lease length of 70 years a property would be worth around 90% of its value in comparison with it having a long lease. So if we are going on the basis that £485,000 is the value of the property with a 70 year lease, following an extension to 160 years it’s value would be around £530,000.

What is more likely is that the property is on the market at £485,000 and the agent is taking no account of it’s current lease length. If we deem that to be true the property is worth £436,500 with a 70 year lease.

The valuation for acquiring a new lease is not as straight forward as the difference between the two values i.e. £485,000 – £436,500 = £48,500, as amongst other factors the increase in value from the granting of a new lease is shared equally between the leaseholder and freeholder.

On the information you have given me, I would estimate the cost of a new lease to be somewhere between £35,000-£40,000. You should bare in mind that you will be responsible for the freeholders reasonable costs such as solicitors and surveyors fees. This could then be deducted from the purchase price.

One final consideration is that the Act states that to qualify for a new lease the leaseholder has to have owned the property for a minimum of two years. In your scenario you would have the current leaseholder serve notice on the freeholder and assign the benefit of that notice to the lease, enabling you to complete the process once you have purchased.

Question

I am looking at the possibility of purchasing a flat with savings and additional borrowing on the equity of my current property.  I am therefore not looking for a mortgage on a prospective flat purchase so a shorter lease will not be worrying any mortgage provider – just me!  I have been advised by an estate agent selling one particular flat that extending the lease will not be a problem as ‘the residents own the freehold’ which would involve only a payment of £1 for the lease extension plus additional solicitors costs of approximately £1000.
 
If this were to be the case then that is no problem but I do not want to be naive in my dealings with the agent as they might be desperate to offload a difficult sale.  Do different rules apply if the residents own the freehold of a block of flats?  If extending a lease does not cause me huge problems, be they financial or stress, then this may be a way of picking up a potential good buy.

Answer

In theory if the property is sold with a share of freehold you should be able to extend your lease at a nominal rate i.e. £1, if the other freeholders are happy for you to do so. If your property is the only one with a short lease (and the others extended when they bought the freehold) they could request that you pay a premium to extend. To complicate this further the current owner would have to do this as you would have to have owned the property for 2 years to extend under the Leasehold Reform Act 1993.

My advice to you is to request that the current owner extends the lease before you exchange contracts. He may if the other freeholders are reasonable do this for £1 plus solicitors costs. The last scenario you would want to find yourself in is one where the freeholders, whilst slightly greedy, use their full rights under the Act and demand a full valuation to determine the premium for you extending.

Question

I am looking to extend my lease. Can you give some indication of the likely time scales?

Answer

Pursuing a lease extension (technically a new lease) under the Leasehold Reform Act 1993 places certain parameters on both the lessees and the freeholder in terms of time scales for response. A typical example would be as follows:

Week 1:
You instruct a surveyor to undertake a leasehold valuation of your property and produce a report indicating the likely premium to be paid. You would be requested to provide a full copy of your lease (often obtained from your solicitor if you don’t have a copy) to determine ground rents, the current lease length and any other relevant details.

Week 2:
Having received a copy of your report you decide to proceed. At this point a section 42 notice would need to be served on the freeholder. The notice must by signed personally by the lessee.  Even if you employ an agent to act on your behalf they cannot sign the notice for you.

Week 2 plus 2 months:
Once the notice has been served, the freeholder will have 2 months to respond with a counter notice. To obtain this they will most likely instruct a surveyor to come and value your flat and also a solicitor to deal with your notice and serve their counter notice.
It is also worth noting that the freeholder’s solicitor may request that you provide them with a deposit of either £250 or 10% of the amount of the proposed premium, whichever the greater.
If the two figures are within a reasonable distance of each other you may well be able to agree with your freeholder the premium to be paid. If not you will need to instruct your surveyor to negotiate with the freeholder’s surveyor on your behalf.

Within a further 6 months:
Between the service of the counter notice and a further 6 months, the two surveyors will try to agree between them the premium to be paid by the lessee. This is typically done over email and each side is responsible for their own surveyor’s fees. The time spend varies on the complexity of each case and the speed at which this is completed is very much down to the surveyors.
If negotiations are failing to produce a conclusion, either side can apply to the Leasehold Valuation Tribunal (LVT) no sooner than 2 months but within 6 months from the service of the counter notice.
In most cases it is in neither side’s interest to go to and incur the costs of going to LVT and each side’s surveyor should advise his client of the full cost implications of the arrangement and therefore provide advice on whether it is the best solution.

Following the LVT decision:
The LVT determination will become final within 28 days. Either side can appeal to the Lands Tribunal with the leave of the LVT.
Once the LVT decision is deemed final the freeholder must provide a draft lease within 14 days. Your solicitor should be instructed to review the lease as you then have a further 2 months in which both parties should enter into it.
If these two months pass, the leaseholder can apply to court within 2 months and the freeholder fails to meet his obligations.

Question

The flat I want to buy has a balcony, but it’s not included on the lease drawings, the only access is through the flat and the present owners have never had a problem with its use.

We have asked them to approach the Landlord and get this changed, they have told us that the Landlord has no problem to change the lease but they haven’t had this done as then they would have to pay for maintenance and repair. Should I just do the same and leave it as is, or do you think it necessary to have the balcony included in the lease.

As I said there is no access to the balcony apart from the flat.

Answer

I think for peace of mind I would prefer to have the balcony formally included in the lease. I doubt that there is anything sinister behind the current owners not asking; they probably just want to sell the flat without the hassle of the legal process involved in amending the lease.

Question

I am interested in buying a flat that is on the market for £249,950 but I am told it has only 75 years left on the lease. I was told by the realtor that the original asking price was £275,000 but they put it down due to the cost of the renewal, which they estimate at around £10,000.

According to all the articles I read, it is very difficult to assess how much the extension will cost, and, besides, I wouldn’t be able to do it unless I have lived in the flat for two years. I am thinking of letting the flat out to a friend, so I wouldn’t be living in it either. So, I just wanted your opinion in terms of whether I should pursue this flat or just let it be? I’m a first time buyer and I totally fell in love with it, but wouldn’t want to get into a bottomless pit as I haven’t got unlimited resources!

Answer

As you say, it is not possible to put a firm value on the lease extension without having seen the flat and the lease. I would say that the premium is likely to be more than the £10,000 discount offered.

You do not have to live in the property to qualify for a lease extension, but you do have to own it for two years. The only alternative to this is for the present owner to issue the notice now and then they can assign the notice to you when you buy the flat. This means that you can effectively extend the lease right away.

Question

I am applying for a new lease on my flat under the terms of The Leasehold Reform, Housing and Urban Development Act 1993.  Will the new lease be on the same terms as my original lease?

Answer

The new lease will generally be on the same terms as the original lease with two obvious exceptions:-

  • The new lease will be at a ‘peppercorn’ rent (effectively no rent)
  • The new lease will be for a term expiring 90 years after the term date of the original lease.

Whilst the landlord and tenant are free to agree the terms of the new lease under Section 57(6) of The Leasehold Reform, Housing and Urban Development Act 1993 neither party can dictate the terms to the other and, in the absence of agreement, changes that can be made are very limited and are covered in Sub-Sections (1) to (5) of Section 57.

The change that may most commonly occur is often in relation to older leases where in the original lease the landlord is unable to recover the cost of complying with any obligation for the provision of services or for repairs, maintenance and insurance.

Question

I am applying for a new lease under Section 42 of The Leasehold Reform, Housing and Urban Development Act 1993.  What other costs will I have to pay in addition to the premium for the new lease?

Answer

In addition to the premium you will obviously have to pay your own professional fees, such as valuation fees and solicitors’ fees.  Section 60 of the Act states that the tenant (lessee) submitting a Section 42 Notice will also be responsible for paying certain of the costs incurred by the landlord (freeholder).  These are:-

  • Any investigation reasonably undertaken of the tenant’s right to a new lease.
  • Any valuation of the tenant’s flat obtained for the purpose of fixing the premium or any other amount payable by virtue of Schedule 13 in connection with the grant of a new lease under Section 56.
  • The grant of a new lease under that Section.

This means that effectively the lessee would be responsible for any legal and valuation costs incurred by the freeholder in connection with the grant of the new lease.  The act does say that the costs have to be ‘reasonable’ and goes on to define this further by saying that they ‘shall only be regarded as reasonable if and to the extent that costs in respect of such services might reasonably be expected to have been incurred by him if the circumstances had been such that he was personally liable for all such costs.’

It is worth noting that if agreement cannot be reached between the Landlord and Tenant each party will be responsible for their own costs in attending a Tribunal.

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Question

I am applying for a new lease under Section 42 of The Leasehold Reform, Housing and Urban Development Act 1993.  What other costs will I have to pay in addition to the premium for the new lease?

Answer

In accordance with Schedule 2, Paragraph 2 of the Regulations the freeholder (landlord) can serve on the lessee (tenant) a notice requiring them to pay either £250 or 10% of the amount of the proposed premium, whichever is the greater. If the Section 42 Notice is later withdrawn, or ceases to have effect, the landlord can be required to return the deposit.  However, the landlord would be entitled to deduct any costs incurred that he would be entitled to claim under Section 60 of The Leasehold Reform, Housing and Urban Development Act 1993.

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