Why is the length of your lease important? What are the implications if you have a short lease, what’s the process for lease extension and what is the cost of lease extension?
The length of the lease on your property is a major consideration for all UK investment property purchasers. There are several important points to consider:
- A short lease (under 85 years) is hard to sell
- Short leases (under 85 years) are worth less and are harder to mortgage or re-mortgage
- Leases are a wasting asset… when they runout they are worthless
- A lease extension protects your asset against erosion by time and safeguards your investment
- An extended lease is usually at a peppercorn ground rent (meaning there is no ground rent)
- The longer you wait to extend your lease, the shorter your lease becomes and the more the cost of the lease extension rises
- If a lease has less than 80 years remaining it will be more expensive as there is “marriage value” consideration
The process to extend your lease is called Leasehold Enfranchisement. In the UK, under the Leasehold Reform, Housing and Urban development Act 1993, leaseholders have the right to extend their lease, (subject to certain qualifying criteria being met) for a period of 90 years, without any ground rent.
Over the course of time as the years of the lease reduce, so does the value of the Leasehold property and as the term of the lease gets shorter the premium payable to extend the lease increases.
In order to extend a lease, you need to be a qualifying leaseholder, which means the following:
- You have owned the long lease for more than 2 years.
- The lease is a long lease, which is a means that when the lease which was originally granted, it must have been for more than 21 years.
However, you will not be a qualifying leaseholder if:
- The landlord is a charitable housing trust and the flat or apartment is provided as part of the charity’s work.
- It is a business or commercial lease.
The next steps:
Assuming you qualify, you can then appoint a surveyor and solicitor who specialise in Leasehold Enfranchisement. The surveyor can provide an opinion on the likely premium to be paid for a lease extension.
You will serve a Section 42 notice to the Competent Landlord requesting an extension to the lease. Your Section 42 Notice will contain the details surrounding your lease extension, which will include the premium you propose to pay and the terms of the new lease.
The premium quoted in the notice may not be the price you eventually agree following the tribunal’s decision or negotiations with the landlord, but it will be the figure the landlord uses to calculate the deposit they will ask for. The premium proposed must be a genuine opening offer. If the offer quoted is not a genuine offer (to try to reduce the deposit), the notice may not be valid.
It is likely that a landlord will request payment of the statutory deposit once the notice is served. This will be either 10% of the premium quoted in the initial notice or £250, whichever is greater.
How much will the lease extension cost?
The amount you pay for the lease extension is known as ‘the premium’ for the lease extension. By law, a full valuation isn’t required and it will be virtually impossible for the surveyor to provide an exact cost.
The surveyor provide will provide you with a ‘best and worst’ figure, valuing the extension from the tenant’s and the landlord’s perspective. They will also use their experience of properties in the local area to anticipate claims the landlord might make. There is no such thing as a definite, fixed price for a new lease. Make sure you are aware right from the beginning of the process of the likely price range so you are not surprised at a later.
You should also bear in mind that you will be liable for the landlord’s costs.
The eventual cost of the new lease will be the premium, plus both your own and the landlord’s ‘reasonable’ legal and valuation costs (not including any costs which arise in connection with proceedings heard before a tribunal).
What will the terms of the new lease be?
There are various legal requirements for the terms of the new lease. These are as follows:
- A peppercorn rent, that is, no ground rent, will be charged for the whole of the term (the 90-year extension plus how long is left on the current lease).
- The new lease must be on the same terms as the existing lease, apart from minor modifications and certain exclusions and additions that are allowed by law.
- Modifications – to take account of any alterations to the flat, or the building, since the existing lease was granted (for example, to gas lighting or coal stores), or to correct a problem with the lease.
- Exclusions – since the 1993 act provides a right to continuously renew the lease, any existing clauses relating to renewing the lease or ending it early, or the landlord’s right to buy the flat if you decide to sell it, should be excluded.
- Additions – a requirement not to grant a sublease which is long enough to give the subtenant the right to a new lease under the act.
What are the procedures and how long will it take?
Once a valid section 42 Notice is served, a strict timetable is triggered. Instructing specialist advisers will mean your interest is safeguarded.
- You serve an information notice under section 41 of the 1993 act. (You do not have to serve an information notice.)
- The landlord must respond within 28 days.
- You serve a tenant’s notice under section 42 of the act.
- The ‘valuation date’ will be fixed as the date you serve the tenant’s notice.
- The landlord can ask for extra information, but they must do so within 21 days of receiving the tenants notice.
- You have 21 days to provide any information the landlord has asked for.
- The landlord must serve a counter-notice by the date stated in the tenant’s notice. This date must be at least two months from the date you served the tenant’s notice.
- If the landlord does not serve the counter-notice by the date stated in the tenant’s notice, you must apply to the court for a vesting order within six months.
- After the landlord serves a counter-notice, you or the landlord can apply to the tribunal for an independent decision. You must do this no sooner than two months from, but within six months of, the date the counter-notice is served.
- The fee for applying to the tribunal is £100, and the hearing fee (once you receive notice of a hearing date) is £200.
- The tribunal’s decision becomes final after 28 days. If you do not agree with the tribunal’s decision, you can appeal to the Upper Tribunal (Lands Chamber) before the decision becomes final, but only if you have the tribunal’s permission.
- After the tribunal’s decision becomes final, you and the landlord have two months to enter into the new lease.
- If you and the landlord do not enter into the new lease within two months of the tribunal’s decision becoming final, you have a further two months to apply to the court to order the landlord to meet their obligations.
You should appoint a surveyor and solicitor who specialise in Leasehold Enfranchisement who will act on your behalf and guide you through this process. However, as a property investor given the length of your lease can be pivotal in the performance of your investment, you should have a good understanding of what it means to have a shorter lease and an understanding of the process for extending it.
We hope you have found this article useful, feel free to comment or ask any questions. For more information on about investing in the United Kingdom check out our other articles and request your copy of our Buyers Guide to the UK [email protected]
We’ve produced articles not just for UK, but also Australia and New Zealand, so make sure you take the time to consider all your options and make sure your investment is right for you.
Important notice: Proptech Pioneer and its associated companies seeks to provide investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, conveyance, lawyer, financial advisor or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision
