Selling and passing on the right to extend the lease

Most flat owners are aware of their rights for a lease extension – as long as they have owned the property for 2 years they are entitled to require the landlord grant a 90 year extension and that the ground rent be reduced to NIL or Peppercorn.

What happens if you want to sell the flat? Do you still bother with the additional legal cost of the formal Notice ( known as a section 42 Notice) ? Will this delay the sale? What about the cost of the premium for the lease extension?

You can benefit from a certain action and this can benefit the purchasers as well, forget for a minute about the cost of the extension, your key aim is to sell the flat; let’s just look at what can be done with the formal section 42 Notice!

The answer is that the section 42 Notice should be assigned to your purchaser along with your flat.

THIS WILL:

  • Immediately pass on the rights of the lease extension to your purchaser who would otherwise have to wait 2 years from the Registration of their ownership.
  • They would benefit from a lower extension price rather than suffer from the affect of a shorter lease and inevitably higher flat values.
  • If they cannot agree they would have rights to take the matter to a Tribunal.
  • Most importantly you may well be able to sell the flat whereas you may otherwise find it difficult.

AND you need not pay the premium for the lease extension, nor indeed the costs of preparing and serving the Notice; those can be paid for by the purchaser, after all it is they who will benefit.

At Each Side Leasehold we carry out valuation work for either vendors or purchasers. Often a purchaser who has not exchanged contracts wishes to know the approximate premium for the extension so that they can make an objective decision on the amount to pay for the flat’s leasehold interest. We also act for purchasers who have bought the flat with the Notice, we then negotiate with the landlord’s valuers and if we cannot agree act as Expert Valuers at the Tribunal.

A final word of warning: a section 42 Notice must however be formally and properly assigned by the Solicitors otherwise on the completion of the sale of the flat it will be useless and deemed withdrawn. You may well be liable for abortive costs.

Lease extensions – An Offer you cannot refuse?

Many flat lessees can be faced with tempting offers from landlords on a lease extension that is done “informally” or “outside the Act”.  The Act would otherwise give a flat owner lessees who can prove ownership for at least 2 years a 90 year extension on top of what they have already and the ground rent reduced to nil or a peppercorn. A Landlord may offer to reduce the premium, their fees and even grant a 999 year lease. The ground rent they say is £TBA or RPI Linked. Sounds good but we say Beware!

Flat lessees must weigh up all the information to compare what is on offer to what they are entitled to by law. RPI indexation seems a sensible idea but the starting amount must be known also the frequency and dates of review. RPI has increased by just over 30% in the last 10 years but over the last 40, well within a lease term, a whopping 818%. It is no co-incidence that ground rent investor landlords can pay 50% more for long leases where the ground rent is linked to RPI than where one is not!

Of course a flat owner may wish to extend under the Act at any time after but any premium payable will have to take into account the income and future growth that a landlord will lose as a result of the lease extension.

Our service guides flat owners in the right direction for them and helps to give them an objective view so that together with help from their Solicitor they can make the right decision.

FREEHOLD PURCHASE – DON’T FORGET THE BIT ON THE SIDE!

Do you approach the cost of your freehold purchase on the basis of a collective amount based on the number of flats in the building? While this may give a fairly accurate figure where there is little additional land such as flats in a converted terrace house, this is not always the case where the building sits in its own grounds.

The freeholder will often seek an additional amount for this area which could be quite substantial. How can this be and what are the circumstances of such a claim?

The 1993 Leasehold Reform Act gives qualifying flat owners the right to purchase the freehold of the building in which the flats are situated. They are likewise entitled to purchase say a garage or a parking space included in their lease and where they have exclusive use, sometimes this ownership is by way of a separate long lease or leases. Finally they are entitled to purchase the garden and grounds over which there are communal or shared rights in the flat leases. The problem lies with this third category where it can be shown there is additional value which the enfranchising group benefit from having bought the freehold and which may not be apparent before the purchase.

Lets take some examples. The obvious one is where the garden and grounds over which there are shared amenity rights is somewhat larger than may be simply for the enjoyment of the flat owners. It may already have planning permission for additional similar residential development, or it have have hope value for this at some time in the future. In either case this will show a value higher than as amenity land. It will be part of your valuation surveyor’s duty to flag this possibility for you although a clue can often be seen in the ‘landlords retained rights’ section of the leases.

In fact the wording of leases is often helpful in indicating where there might be an additional bit on the side! We have recently provided advice to a freeholder client faced with a formal notice of enfranchisement from two flat owners in a converted house. The effect of wording such as ‘rights of access on foot only’ will disappear with the purchase of the freehold and in an area with limited on street parking the grant of vehicular rights with the freehold transfer is of additional value.

Another example where we acted for the flat owners concerns an amenity area and noted as such in the lease but which over the years had become used by flat owners to park their cars. The lease did not prohibit parking but the tribunal nevertheless valued this as such.

The moral is to avoid the DIY valuation, and get proper and experienced advice from a professional valuer.

WHY SHOULD I EXTEND MY LEASE?

If you own or are buying a flat with less than 80 years on the lease then you should be taking action to protect what is likely to be your most valuable asset.

Leases are set for a number of years and like sand in an hour glass will eventually run out and revert to the freeholder. It’s a downward spiral – as the lease gets shorter its value decreases and it becomes more expensive to extend. Ideally you should take action while the lease is just over 80 years – it will certainly cost you less than if you wait until it drops below 80 years and you have to pay additional Marriage Value to the landlord (see our blog on Marriage Value).

Fortunately the Leasehold Reform Act came in to force in 1993 to give leaseholders the right to extend their lease. As you as you have owned your flat for a minimum of two years then you have a right to a 90 year lease extension at a peppercorn or nil ground rent. There’s nothing to stop you agreeing the cost of the lease extension by private agreement but you should be cautious if you take this route as when no statutory notice is served the landlord is likely to ask for an inflated premium as well as an increase in the ground rents.

If you decide to extend your lease under the 1993 Act the process is regulated and relatively simple if you take expert advice from an independent valuer and solicitor. You should also be aware that if you want to sell your property you can serve a formal section 42 notice and assign the right to the lease extension to the incoming buyer. This can be key in securing a successful sale as without this a buyer wouldn’t have the same legal rights as your for another two years.

Don’t be put off by the costs involved – look at the lease extension as an investment which will increase the value of your property by thousands and make it more attractive to potential purchasers. If you sit back and do nothing you will struggle to sell a property with a short lease and anything under 75 years will potentially be unmortgageable.

 

HOW TO ESCAPE MARRIAGE VALUE!

Start formal action before the lease has less than 80 years to run! To be 100% certain get your solicitor to serve formal notice on the landlord within that deadline. Where leases have 80 years or less to run the payment can be considerably more as the landlord gets a 50% share of the increase in the value of the flat as a result of the lease extension – this is MARRIAGE VALUE! It follows that the shorter the lease the more the gain in value following the lease extension the greater will be the 50% or Marriage Value