In 2018, the Ministry of Justice Law Commission was asked by government to review the process of extending or buying a lease and make it simpler, easier, quicker and more cost effective for leaseholders to achieve their goals.
One of the major issues will be to carefully balance enabling leaseholders to acquire or extend their lease whilst fairly compensating freeholder / landlords.
So, should leaseholders extend or buy their leases now – or wait until the Law Commission for England and Wales publish their conclusions?
Any leaseholder on a long lease is affected by leasehold enfranchisement legislation. The Law Commission says the enfranchisement law gives these leaseholders several important rights:
- To extend their lease
- To acquire the freehold of their house
- To acquire (collectively) the freehold of their block of flats
Current law surrounding this thorny issue can be difficult to unravel.
For instance, if there are fewer than 80 years left on a lease and a leaseholder wishes to extend, it will cost more to do so, but why?
Charles Oliver, Associate Director at Caxtons explains: "It seems obvious that extending a lease would automatically add value to a property. The Leasehold Reform Housing and Urban Development Act 1993 allows this to be done, but the freeholder / landlord is entitled to half of that increased value. The final calculation of cost is reached by valuing the property as it is (with, say, 79 years on the lease) for both freeholder and leaseholder, then valuing the property with an extended lease (eg: + 90 years = 169 years left) and adding half of the difference in value to the cost of extending the lease. This will be how much it will cost the leaseholder to extend the lease and is known as a Marriage Fee."
Charles gave one stark example of why it is important to take advice when venturing into leasehold law:
In 2006 a leaseholder unwisely agreed to a lease beginning at £1,000 per year and doubling every 10 years. When she asked the freeholder to extend her lease he asked for £120,000, even though the flat would only be worth £160,000 with a new longer lease.
He reduced his demand to £70,000 then, to avoid adverse publicity, to £40,000, which she reluctantly accepted. As the lease had more than 80 years to run there was no marriage value to add, but the price she paid was closer to that of a lease with around 30 years to run. For a flat with 93.8 years remaining, £10,000 should have been closer to the mark.
With the Law Commission's findings and recommendations still awaited, it is difficult to predict any outcome, or guess whether it would be advantageous to act now or, if there is time to spare (ie a few more than 80 years!), to wait for their conclusions before extending or even buying a lease.
As it is their stated aim to reduce the price payable by leaseholders to enfranchise, patience may in this case be a virtue. Whatever the result, it is still always advisable to engage an expert.
Charles' Simple Fact sheet:
Extending a lease on a leasehold property:
- Usually, leases begin on either 99 or 125-year terms.
- As the time on a lease reduces, the value will also diminish.
- It could prove difficult to sell the property, and it becomes more difficult to get a mortgage on a property when there is less than 60 years left to run.
- If the flat and leaseholder are eligible, and the leaseholder has owned the flat for 24-months, they may extend the lease by 90 years without paying any ground rent
- The cost of extending the lease will be based on the value of the ground rent due; and the remaining length of the lease - the shorter the time left, the more costly it will be to extend.
- The price will take into account that the landlord must now wait another 90 years before realising the full market rent, and the loss of rental income in those intervening years.
- The premium to extend a lease that has fewer than 80 years left will increase, because the freehold and leasehold values before and after the lease is extended are taken into consideration in the equation and the landlord will be entitled to 50% of the increase – this is known as the 'marriage value'.
- Legal and surveyor costs will also be the responsibility of the leaseholder.
- The Leasehold Reform Housing and Urban Development Act 1993 has defined deadlines to adhere to.
- Information about the landlord may be obtained by the leaseholder.
- The landlord or his surveyor may attend the property in order to value it; he can request a deposit of 10% of the leaseholders 'offer' and ask for evidence that the leaseholder is entitled to extend the lease.
- Leaseholders must ensure all finances are in place and that relevant documents are available.
Collectively purchasing a freehold with other tenants:
- If a majority of the eligible leaseholders in a block with less than 25% non-residential content collaborate, they may collectively purchase a freehold; in this case the 24 month ownership requirement does not apply.
- If the landlord is not protected and the building fulfils the criteria, as long as the requisite number of qualifying tenant want to share ownership, then they can compel the owner of the freehold to sell to a Right to Buy company or a nominated purchaser. Flat owners will then have a share in the property through the company and will take on the role of their own landlord. This is known as enfranchisement.
- Fees to purchase will be similar to those for extending a lease although it will take into consideration the value of all the leases pertaining to the property and that the landlord will lose all future rental income.
Landlord and Tenant Act 1987
- A landlord may wish to sell to a third party but is duty bound to give tenants first refusal (terms apply).
- If the landlord wants to sell at auction he must give tenants notice of four months' in order for them to stake their claim to match any successful offer.
If there is no agreement over the price with either of the options set out, then it should be referred (within a six-month deadline) to First-Tier Tribunal – an independent adjudicator – who will fix terms.