27 May 2021
This is part of a series of guides in which we examine areas of law that frequently arise in practice. Further guides will be released weekly; click here to subscribe to receive Collas Crill news and insights by email.
We have recently been approached by our client Amir, who having seen an article about leasehold reform on the BBC news website wanted to know if he should extend the lease of his Kensington apartment, which has 81 years left to run. He was worried that it might not be possible for him because he is based in UAE and he and his family use the apartment to visit London in the summer.
This has been news recently as the government once again "vows to end complex leasehold costs". Leasehold reforms are proposed to clampdown on high costs when extending a lease and remove controversial ground rents.
Why extend a lease?
The prospect of an end to unscrupulous leasehold systems begs the question, why should Amir extend his lease now at all? As with all major systemic reform, the wheels of change turn very slowly and currently reform has not been finalised. As such, all leaseholders are subject to the existing regime. Amir should consider extending his lease soon for the following reasons:
- extending a lease with less than 80 years to run can significantly increase the property value;
- as the lease runs on, lenders become more reluctant to lend to potential purchasers and as such the property is harder to sell;
- the less time that is left on the lease, the more costly it is to extend; and
- a lease with less than 80 years remaining becomes subject to marriage value, entitling the freeholder to 50% of the value that such extension adds to the property.
Can Amir extend his lease?
Firstly, it must be established whether Amir is eligible for a lease extension under the Leasehold Reform, Housing and Urban Development Act 1993 (Law). In this instance Amir is lucky because he meets the following criteria required to extend a lease:
- he holds the property under a long lease (granted for a term longer than 21 years); and
- he has been registered proprietor for at least two years.
Amir can begin the process by serving an initial notice to the landlord, requesting the extension. Under the Law there is no prescribed form for this notice however it must contain, certain information including the following:
- the premium the tenant proposes to pay;
- terms proposed for the extended lease; and
- the date by which the counter-notice must be served.
It is important that the details are accurate and not misrepresented as this could render Amir's claim invalid. The "landlord" for the purposes of the claim for a new lease is the owner of an interest in the property. If the immediate landlord is not the freeholder then you need to ascertain whether the immediate landlord has sufficient interest in the property in order to grant the lease extension.
What are the costs?
By Law the notice that Amir serves on his landlord must include the proposed premium payable as part of the extension. The premium that Amir will pay is based on the following:
- the diminution in value of the landlord's interest in the property;
- the landlord's share of the marriage value (being the difference between the value of the landlord's and Amir's interest in the property with the existing lease and the value of their respective interest under a new lease); and
- any compensation due to the landlord for losses arising from granting the lease extension (including, but not limited to, any loss of development value).
This should be calculated by a valuer. As well as the premium, once Amir has served a notice on his landlord indicating his desire to extend his lease, he also becomes liable for the landlord's costs associated with the claim, which include:
- paying a deposit to the landlord of whichever is the greater amount between 10% of the premium proposed or £250;
- allowing an inspection of the property;
- the reasonable investigation of Amir's right to a new lease;
- any valuation of the property; and
- the grant of the new lease, (including drafting and execution advice, but not negotiation, of the lease.
Can the landlord refuse?
The landlord is entitled to refuse Amir's claim however the Law provides for limited circumstance in which the refusal is warranted. Once Amir has notified the landlord of his wish to extend the lease his landlord is required to serve a counter notice by the date specified in Amir's initial notice. Under the Law the landlord has three options in the counter notice:
- admit Amir's claim;
- not admit his claim; or
- refuse to grant a new lease on the basis of redevelopment.
The landlord must respond; failure to do so would entitle Amir to apply to court for an order granting him the new lease on the terms he proposes in his initial notice. If the landlord admits that Amir has a claim the landlord will then either agree to the terms Amir has proposed or more likely propose counter terms. Where a landlord does not admit the claim, they must specify the reasons why and apply to court within two months of their response for a declaration that Amir does not have the right to a new lease.
Similarly, if Amir's landlord were to refuse on the grounds of redevelopment the response must state this and the landlord must apply to court within two months for an order that the lease should not be granted. The court will be satisfied that the property is to be redeveloped if:
- the lease of the flat is due to terminate within five years;
- the landlord intends to demolish or reconstruct the flat; or
- the works could not be conducted without possession of the flat.
The new lease
Assuming all goes well and Amir's landlord admits his proposed claim, the terms of the lease will be negotiated. Once agreed the landlord must draft the lease and provide Amir with a copy. Amir can then propose amendments before returning to the landlord (within 14 days). The landlord is required to respond to any amendments within 14 days of receipt from Amir. Once the term and form of the lease have been agreed, either party can serve a notice to complete which will require the lease to be completed within 21 days.
Once Amir has made a claim for a new lease, that claim can be withdrawn at any time.
What is the likely overall timeframe?
Applying for a lease extension can take several months. The initial notice from Amir must give the freeholder at least two months to respond. A further two months are allowed for negotiations and, in the absence of agreement, can be referred to the Leasehold Valuation Tribunal. In this case, the process could take over a year.
What does the future hold for leasehold?
The government proposal is that leasehold legislature will bring into effect:
- lease extensions to a new standard 990 years (maximum) with a zero ground rent;
- cap on the ground rent payable;
- ground rents reduced to zero for all new retirement properties to ‘protect the elderly’;
- the introduction of an online calculator to enable leaseholders to easily determine the likely costs for extending the lease;
- abolition of marriage value; and
- leaseholders having the right to agree to a restriction on future development of their property to avoid paying development value.
When will this come into effect? How long is a piece of string…? In October 2020 the House of Commons released a statement that the legislation will come into effect "as soon as Parliamentary time allows". Given major delays caused by the pandemic it is unclear how long this will take. However, The Leasehold Reform (Ground Rent) Bill was introduced to the House of Lords on 12 May 2021, committing to set all future ground rents to zero. That being said, this will provisionally apply only to retirement properties and not before 1 April 2023.
On the timing of future legislation, Lord Greenhalgh, the Minister responsible for leasehold, responded to questions on 5 January 2021 and said:
"We need primary legislation…[it] will take approximately one year"
Leaseholders should be encouraged by the direction in which the reform is moving. However, for leaseholders like Amir, where the lease is approaching 80 years left, it is worth considering the benefits of extending the lease now and the possible consequences (and costs) of delaying the process for too long.
About this guide
This guide gives a general overview of this topic. It is not legal advice and you may not rely on it. If you would like legal advice on this topic, please get in touch with Michael Morris or Donald Millar.
About Collas Crill
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