Category Archives: Lease Extensions

Information for leaseholders and freeholders about the process and costs of extending the lease on a leasehold property.

Why should I extend my lease?

You should consider doing this if the lease is ‘short’, or approaching 80 years in length. Once the lease is under 80 years it will cost more to extend because a factor known as ‘marriage value’ will be added in the calculation.

Properties can be difficult to sell or re-mortgage where the leases are under 75 years and lenders normally like to see 50 years plus the mortgage term (typically 75 years).  In central London different considerations will apply where leases were originally shorter and capital values are higher. Nonetheless properties with extremely short leases will not be mortgagable.

If only cash buyers can buy a property it will reduce its open market value.  You should accordingly take steps to protect the value of the investment in your property before the costs become significant.  An alternative view is to see the asset as a wasting asset, producing an income that is rented out and to let the lease diminish to 0 years.  If this is done, then you may face a claim for terminal dilapidations (damages for wants of repair etc in the premises).  In such a case you should consider taking professional advice.

How long can I extend my lease for?

There is no set limit, if you’re negotiating informally.  Typically, the longest lease extension will be to 999 years on the basis that this is a ‘virtual freehold’ interest.  This would be possible only by agreement.  Often where flat owners have purchased the freehold the leases will be extended to 999 years and the ground rent reduced to ‘a peppercorn’.  This is to transfer all of the value out of the freehold and into the hands of the leaseholders who have participated in the freehold purchase.

If the lease is extended under statute, the maximum term of the extension is 90 years on top of the unexpired term.  In other words if your lease is currently 50 years the new lease will be 140 years long.  There is no option under the statute to agree a lesser or greater period of extension.  The statute imposes this ‘one size fits all’ solution.

By negotiation any lease length can be agreed by way of extension eg 99, 125, 150 and 250 years etc.

Buying a leasehold property with an absent landlord

 

I get a lot of enquiries from investors who have been offered a leasehold property where there is apparently a ‘missing’ freehold owner. Often these properties also have what might be called ‘short’ (i.e. under 80 years remaining) leases. This article looks at some of the key issues that you will face if you are buying such a property.

What is the main problem with an absent landlord?

 Whilst it might seem obvious, the key issue with buying a leasehold property where there is a missing landlord is that this person simply is not around to do anything to the property or, more importantly to take any action that might be required under the terms of the leases – such as to ‘police’ any disputes between leaseholders.

There is also a significant risk that important tasks that are the freeholder’s under the lease, such as repairing or insuring the property may not be dealt with. This could lead to significant disrepair, or a situation where there is no insurance on the building, making the flats un-mortgageable.

Another risk is that the once absent freehold owner may turn up in the future and begin to enforce the terms of the leases. This could lead to litigation or to the risk of the lease becoming ‘forfeit’ – i.e. brought to an end because of a fundamental breach. At the very least there might be an action for unpaid ground rent which could cover up to the last 12 years (on the basis that this is the extent of the applicable limitation period).

Does this make it impossible to buy a property like this?

In short, most of the problems caused by an absent freeholder can be solved as far as making the title acceptable to a lender is concerned. A missing landlord indemnity policy can be purchased – which will cover the flat owner against the risk of litigation brought by the freeholder if he or she returns seeking ground rent or to enforce the lease covenants.

Similarly, an extra policy of buildings insurance policy can be taken out that will cover the risk (if the flat owners have been insuring their own parts of the properties themselves) where one owner has not insured their particular part.

These items, together with a clear examination of what has been going on in practice will generally get you to the point where the title can be considered to be acceptable for purchase (or mortgage) purposes.

But what if I want to extend the lease or buy the freehold?

Whilst the above steps might satisfy a bank or building society, where the lease is short, this problem will not go away unless you are able to take legal steps to enforce your legal rights in the absence of the freeholder.

To state the obvious, if the freeholder has disappeared there will be no-one who can grant you a lease extension, or that you can enter into negotiations with to buy the freehold.  So, what can you do?

Fortunately, there is a ‘missing freeholder’ procedure under the Leasehold Reform Housing and Urban Development Act 1993 (‘the 1993 Act’). Using this you can take advantage of the statutory rights that you would otherwise have under this act – such as to purchase a lease extension of 90 years on top of the unexpired term of the existing lease – or to buy the freehold (as part of a collective with other flat owners).

Both of these present challenges, as to purchase the freehold needs 50% of the long leasehold flat owners to act collectively (although where there are only two flats in the building both must act together). In the either case you will be looking to convince a court that the landlord genuinely cannot be found and that the court should accept service of a claim to purchase the freehold on his or her behalf.

If the court agrees that enough steps have been taken to attempt to trace the freeholder and they genuinely cannot be found, then the matter will be transferred to the Leasehold Valuation Tribunal who will determine a price and then send the matter back to court so that the court can effect the transfer if the required funds are paid into court.

A similar process applies to the right to purchase a 90-year extension on top of the unexpired term of the existing lease under the 1993 Act. However, bear in mind if you are purchasing the property that to exercise this right you will need to have been the registered owner of the property for at least two years (unlike with the right of collective freehold purchase where there is no qualifying ownership period).

If you are purchasing a property with a short lease then any claim to an extended lease started by the seller (assuming that they qualify) can normally be assigned to the purchaser as part of the conveyancing process.

 Missing landlord problems – the initial steps

However, with a missing landlord the process is likely to be much trickier – and subject to some fairly significant delays – if it is not already well under way by the time you make your offer to purchase the flat. This is because to be able to initiate a claim in the County Court, various preliminary steps need to be dealt with such as obtaining a private investigators’ report and placing a ‘statutory advert’ in the London Gazette and also the press local to where the property is located.

These are all part of the preliminary steps to tracking down the missing freeholder that need to be dealt with before a court will accept that the freeholder is truly missing and that it should accept service on his behalf.

Are they really missing?

A lot of the time, the so-called ‘missing’ landlord is not really missing and can be found, either by a bit of investigation or by searches of the electoral roll or similar. If this happens then the claim can proceed in the usual way.

In a similar way, if the freehold is held by someone who is an undischarged bankrupt, or if it is in the name of a company in liquidation or administration then it may be possible to serve a notice on the trustee in bankruptcy, or the administrator of the company.

Where the freeholder has died, then if there is a will the executors will be obliged to deal with the claim and in the case of a complete intestacy, the treasury solicitors’ office may be able to deal with the estate to effect a sale through its ‘bona vacantia’ department.

If the freehold was held by a company and the company has been struck off or dissolved, then once again the Crown, (via the Treasury Solicitor’s department) may be able to arrange the sale of the interest.

This shows is that if you are faced with a property with a missing freeholder the first question has to be ‘how missing are they?’

If you are interested in, or being offered a property affected by this issue, then you should consider taking specialist advice at the earliest opportunity.

What Happens When Your Lease Runs Out

“I want to retire, but the lease on my house is soon to expire”

This is a good question and one that comes up from time to time, particularly in central London where there is often a cost/benefit debate about extending where the term is below 10 years. Most of the compensation is paid in respect of the ‘reversion’ – i.e. the ‘paper profit’ available to the landlord when the lease expires and the property ‘reverts’ back into their ownership.

When a long lease runs out the flat owner has the right to remain in occupation paying a market rent for the property.  However, the landlord can serve a notice under the Housing Act 1989 to bring the long leasehold to an end.  If the landlord serves this certain kind of notice within the last 12 months of the lease term then the flat owner is prevented from being able to exercise their right under the 1993 Act and bring a claim to an extended lease.

There are a number of other points to consider, such as dilapidations, however it is good to see these issues getting an airing in the wider press.