On leasehold properties where the lease has only eighty years to run, this may cause issues for lenders in granting mortgages. Each lender will have their own specific requirements and these are governed by the UK Finance Handbook.
Prior to the Leasehold Reform, Housing & Urban Development Act 1993 (LRHUDA 1993), leaseholders/tenants with insufficient terms left on their leases had little choice but to enter into negotiations with the freeholder (their landlord) to agree an extension of the lease. The technical term for this is a surrender and re-grant for a new term.
Indeed, as part of the price of agreement to extend the lease, the freeholder/landlord would normally usually seek to impose:
- the payment of a premium and renewal;
- an increase in the ground rent (i.e. the ground rent that is mentioned and payable under the terms of the existing lease).
This method of resolving matters with the freeholder/landlord is referred to as an agreement by “private treaty” and is still available notwithstanding the following comments.
LRHUDA 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 for an additional ninety years and to extinguish their ground rent. This process is initiated by service of a Notice (under the Act, and is known as a Section 42 Notice.
The landlord/freeholder will still be entitled to a premium which would 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 Section 42 Notice will contain the tenant’s first offer in regard to the premium but such an offer should be realistic and is normally taken from advice given by a qualified surveyor who is qualified and experienced in such lease extensions. Without this advice, the Notice may be rejected by the landlord with the result of loss of costs in the matter.
The landlord would 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 fourteen days to the landlord’s solicitor to be held as stakeholder.
From here, the statutory mechanism will run on (the negotiation period follows between the landlord and the tenant’s surveyor) and if such terms cannot be agreed then an application is then made to the First Tier Tribunal for them to decide.
There are two reasons why all of this is often important:
- despite the existence of the statutory mechanism, many leaseholders will seek to resolve matters with the landlords by private treaty (as mentioned above) simply for the sake of expediency and potentially to save costs. Indeed, for example, a reason may be that the premium payable may well be lower than the amount payable under the statutory mechanism (as there will be a small reduction in value of the freehold if – for example – ground rents are maintained) but also because of the concerns as to the costs, delays and complications of the statutory procedure; and
- there is a two year qualification period for the extension right under the LRHUDA 1993 and this entitlement is lost on a change of ownership – which means on exchange of contracts for a sale, provided that a Section 42 Notice has been served prior to exchange of contracts, it is possible that Notice and the benefit of such a Notice to be assigned to a buyer/new owner under the terms of the contract. Sometimes the seller (again under the contract) gives the buyer conduct of the process (at their expense) in the interval between exchange and completion. It is important to note that the statutory renewal right cannot be assigned if a Section 42 Notice has not been served prior to an exchange of contracts. Without the Notice being assigned, any buyer who wishes to proceed under the LRHUDA would have to wait a further two years.