The Reynolds Report - The Tricky Business of Lease Extensions

Very few lenders will now lend on a leasehold property where the underlying Lease has less than 80 years of its term remaining. (Each lender has its own specific requirements set out in the CML Handbook but, broadly speaking, you get the picture.)


The Reynolds Report - The Tricky Business of Lease ExtensionsPrevious attempts to resolve this situation through legislation (Leasehold Reform Act 1967 and the Landlord and Tenant Act 1987) having proved unsuccessful,  prior to the entry into force of the Leasehold Reform, Housing and Urban Development Act 1993 (“LRHUDA 1993”) leaseholders (so tenants) with insufficient terms left on their leases had little choice but to enter into negotiation with the freeholder (their landlord) to agree an “extension” of the Lease (technically speaking a surrender and re-grant for a new term but the point is not material and I will refer to “extension”). 

As the price of agreement to the “extension” the freeholder/landlord would usually seek to impose:

  1. The payment of a premium; and
  2. An increase in the “ground rent” (i.e. the rent payable under the Lease).

This method of resolving matters with the freeholder/landlord is referred to as “agreement by private treaty” and is still available and – notwithstanding what follows – still used surprisingly often (see below).

LHRUDA 1993 contained provision under which a “qualifying tenant” (basically a leaseholder who had owned their property for over two years) was entitled to extend the term of their Lease by a further 90 years and to extinguish their ground rent. 

The process is initiated by service of a notice (a “section 42 Notice”).

The landlord/freeholder will still be entitled to a premium – which will be based on the diminution in value of its freehold as a result of the extension of the Lease (and the reduction in ground rent).   The s.42 Notice will contain the tenant’s first offer with respect to that premium (advice should normally be taken from a surveyor to ensure that the initial offer is pitched at the correct level).

The landlord will usually then serve a counter notice (within the statutory period of two months) and require payment of the statutory deposit (10% of the premium quoted in the Notice).  This must be paid within 14 days to the Landlord’s solicitor to be held as stakeholder.

From here the statutory mechanism will run on (negotiation period followed, if necessary, by Tribunal determination).

There are two reasons why all of this is often important:  

  1. Despite the existence of the statutory mechanism, many leaseholders will seek to resolve matters with their landlord by private treaty (see above).  They do this for a variety of reasons – not least of which because the premium payable may well be lower than that payable under the statutory mechanism (as there will be a smaller reduction in value of the freehold if – for example – ground rents are maintained) but also because of concerns about the cost and complication of the statutory procedure; and
  2. There is a two year qualification period for the extension right under LHRUDA 1993 so, if a lease is assigned without the benefit of any s.42 Notice also being assigned, then – under s.43(3) LRHUDA 1993 – the Notice is deemed to have been withdrawn.  This means that any contract for sale must include terms assigning the benefit of the Notice (sometimes the seller - again under the contract -gives the buyer conduct of the process, usually at their own expense, in the interval between exchange and completion.) (Any “deal” done with the landlord under private treaty is likely to fall away on a change of ownership unless the contrary is explicitly agreed.)

Whilst it may still, in the end, make commercial sense to do a private deal with the landlord, the tenant’s hand is very much strengthened by the existence of the LRHUDA 1993 mechanism: in particular its provision for the extinction of the ground rent.

There are increasing reports of unfavourable ground rent provisions in privately agreed extensions – which are usually stored up in the form of unfavourable rent review provisions in the “small print” at the end of the lease.   These can lead to a massive increase in ground rent over the course of the lease.

If you wish to avoid difficulties of this type contact the Conveyancing Department at Barrett & Co – in particular Mr Alan Warnes who is our lease extension specialist.

Further Reading:

Brexit and the property market – is Gazundering back?

Old Restrictive Covenants Over Land - Do You Need To Be Bothered?

Emptor Scriptor Legisperitum Caveat (“Let the Buyer’s Lawyer Beware”)

Landlord mistakenly grants 2000 year tenancy after not taking legal advice

 

 

 
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