Tag Archives: Info for leaseholders

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.

I have been offered a ‘voluntary deal’ for a lease extension with a ground rent. Is there anything I should look out for ?

“I have been offered a voluntary deal with an increasing ground rent – the premium seems OK (lower than I was being offered for a ‘statutory’ deal). What should I do?”

This is often a difficult decision to make and depends on a number of factors.

Firstly, you will almost certainly need independent valuation advice. The landlord may well have put forward a ‘deal’ that appears to make sense, but remember a lease with a premium and a ground rent needs to have the correct balance of both to make sure that you do not end up paying for the same thing twice.

Often the freeholder/ landlord will ask the flat owner to pay for a valuation – although the contents of this will not be disclosed to the flat owner and a deal will be presented on a ‘take it or leave it’ basis. Of course, this is entirely correct, as if you want to carry out a ‘voluntary’ deal, then this reflects the true position because unless you can both agree the terms then no sale of a lease extension is going to be possible.

A lot of landlords put forward terms that are very similar to those available under the 1993 Act, or that include ground rents similar to the terms of the existing lease. These can often represent good value, for the reasons discussed below.

From a landlord’s perspective, ground rent is what gives the freehold long-term value. Increasing, or keeping a ground rent may mean very little to the flat owner and often if the deal is ‘right’ there can be a ‘win win’ situation where both the freeholder and the flat owner are happy.

Often an informal deal does have certain attractions. It will be quicker and perhaps the transactional costs will be lower or certainly more contained. If you do not qualify for a statutory lease extension (for instance because you have not owned the flat for 2 years), then this can also may only be the ‘only’ route open to you if you cannot extend your lease under the statute yet and do not want to wait. It might also be that you are selling the property and cannot put a statutory lease extension claim together to hand on to the buyer because they need the lease to be extended by the time they complete because of their mortgage lender’s requirements.

As to what to do if the proposed new lease contains a ground rent, one of the main points to consider is probably your own long-term view. If you are going to sell your property in one or two years’ time then you may not be too concerned about an escalating ground rent in say 15 or 20 years’ time. However, if any new owner (or indeed you, if you keep the flat) wants to purchase the freehold or extend the lease under the 1993 Act then any new ground rent will have to be ‘bought out.’ If the rent is small, this will not be a big factor, but if the ground rent were to double, say, every 15 or 20 years and starts out at £250 per annum then rises, say to £250, £500, £1000, £2000 the amount will be much more significant.

Solicitors have a duty to report any ‘onerous’ ground rent provisions to mortgage lenders and the test is essentially whether the ground rent imposed will affect the marketability of the property. If the rent is low now, then this is unlikely to be a problem, but it has to be borne in mind that at some point in the future this is likely to be a bigger issue. Whether a rent is likely to affect marketability is really a question for a valuation professional.

If the proposed terms include a ground rent, then it is very probably worth getting this checked out to ensure that the transaction represents fair value. If you are looking for a recommendation for a surveyor or valuer to assist you, then of course your solicitor (if expert in this field) should be able to recommend someone suitable, you may also be able to find details of suitably accredited valuation professionals on the ALEP website.

Should we go for the freehold or exercise the Right to Manage ?

This can be a potentially confusing choice for a collective of flat owners and depends on what exactly the likely participants want to get out of the process. It is important to get this right at an early stage in a collective action so as to avoid a lot of wasted time and effort in the early part of the process.

In short, the answer depends on what you want to get out of the process and what the key motivating factor(s) for pursing some sort of collective action are.

Do you have only management issues?

If your main objective is to deal with only the issues arising out of the management of the block, then the ’Right to Manage’ may be more appropriate.

How long are your leases?

If some or all of the leases in your block are short then there is likely to be a higher capital cost to buying the freehold and also funding non-participating flat owners. This is can be a potential ‘deal breaker’ for a freehold purchase if those taking part cannot (or do not want to) fund the non-participating flat owners and outside funding cannot be found (or is not wanted).

If there are a variety of lease lengths then there may also be issues as those with shorter leases will have to pay more to take part and this disparity may be a barrier to getting a freehold purchase started.

In such a case, then Right to Manage, (possibly followed by lease extensions for those that are interested) could well be the best way forward.

Longer leases, but management an issue?

Normally, if the leases are ‘long’ then there may be less of an incentive to pursue the freehold. However, if the building’s management is an issue then provided that there is a good level of participation and that the capital cost per participant is not too high, then buying the freehold may well be the better option.

This is because the transactional process in terms of cost and timescale may well be similar for freehold purchase and the right to manage. As such, freehold may be a better result as the ownership (as well as control of the landlord functions under the leases will change).

As always these sorts of decisions need to be made on a ‘case by case’ basis however, the above may well prove a useful starting point for discussion. Appropriate advice from a suitably qualified professional should be sought when making any group decision about the relative merits of freehold purchase or right to manage.

I’m fed up with the building management – is there anything I can do?

There certainly is. Collectively you have the right to take over the management of the building using the so-called ‘Right to Manage.’

The qualification criteria are similar to freehold purchase under the 1993 Act but this is a right arising under the Commonhold and Leasehold Reform Act 2002.

Provided that you have 50% or more of the flat owners on board you can serve the relevant notices and then take over all of the management functions held by the landlord under the terms of the leases.

Whilst the landlord retains legal ownership, day to day management and control rests with the flat owners via their ‘Right to Manage’ company.

The procedure involves serving a notice of invitation to participate and then following this up with a notice of claim. Needless to say, the notices must be served correctly to be valid. You will also need to incorporate a ‘Right to Manage’ company to exercise the management functions. All those who will participate need to be members of this company before the notice is served.

It may also be necessary to consider carefully the timescale for the transfer of obligations under ongoing management agreements and you will generally need to have a new property manager ready to take over the landlord’s functions when the right has been exercised.

Like all of these processes, success lies in proper preparation and planning and of course, appropriate professional advice.