Most flats in England and Wales are leasehold Properties. If you own a leasehold property, you should be aware of the remaining term of the lease on your flat. In this article, we will use the terminology “tenant” for owners of leasehold properties and “landlord” for freeholders.
Particular concern should arise when the remaining term of your lease is around 80 years. Leasehold properties tend to be less marketable if the lease term has less than 80 years remaining. In addition to this, mortgage rates are likely to be higher and some lenders will refuse to mortgage properties with less than 70 years remaining on a lease. This would therefore restrict the range of potential buyers to cash buyers only.
If you are a “Qualifying Tenant”, then you can extend your lease. The 1993 Leasehold Reform Act (“the Act”) defines “Qualifying Tenant” to be an owner who has own the property for at least 2 years (“the qualifying period”).
The Act prescribes what you need to do to extend your lease:
• Serve notice on the landlord to extend the lease.
• Propose to pay a premium for the lease extension – this will need to be a fair market price for the extension.
• The Act states that the lease can be extended by 90 years the rent adjusted to a peppercorn (nil). If for instance, you have 85 years left on your lease paying an annual ground rent of £100, the new term will be 175 years after the extension and no further ground rent will be payable.
The qualifying period is an important threshold and one that you may need to consider if you are buying a property where the unexpired term of the lease is around or under the 80 year mark. On the one hand, you cannot extend the lease until you have owned the property for two years. And on the other hand, the shorter the remaining term is, the higher the premium will be.
Various lease calculators can give the tenant an idea of the premium payable for the lease extension. Once a tenant is ready to proceed with the lease extension, he or she should hire a surveyor to get a valuation of the flat and an estimate of what the premium should be. This will help the tenant in making an offer when serving notice of the landlord. The landlord will most likely also carry a valuation of the flat to determine the premium payable and serve a counter-notice with a counter-offer on the tenant.
The tenant should be aware of the fees he or she are likely to incur when extending their lease. They are:
• Surveyor’s fees
• Tenant’s solicitors’ fees
• Landlord’s legal fees
• Landlord’s surveyor’s fees
It is highly recommended that tenants are represented by solicitors as an invalid will prevent them from making a further application for over a year. Solicitors will also be able to facilitate negotiations of the premium between the landlord and tenant. If a premium cannot be agreed or the landlord is unresponsive, the tenant will be able to apply to the Tribunal to have this matter resolved.
If the above seems daunting and costly, a tenant should bear in mind that for a small premium payable, an extension of the Lease will most likely bump up the value of the Property.