Extending Residential Leases – Get qualified, experienced advice!
Updated: Mar 10
Extending residential leases is often desirable and can be essential. When a new flat or apartment is purchased a ninety-nine year lease, for example, may seem to stretch out into a distant future. However, a glance at the minimum unexpired lease term that leading mortgage lenders require shows that after the first thirty years of the lease has passed the property may no longer be acceptable, making a property difficult, if not impossible to sell.
There are two ways of extending residential leases that are “qualifying” leases.
In order to be a “qualifying” lease the Leaseholder most commonly has to be the tenant under a lease for a term originally exceeding twenty-one years and they will usually have to have owned the lease for at least two years. The premises must be residential, business leases are excluded.
Provided that the “qualifying” conditions can be met the law gives the Leaseholder a statutory right to an extension of their lease for a period of ninety years plus any unexpired term of the original lease. The new lease will be at a peppercorn rent, so ground rent will disappear, but in other respects the new lease will be on the same terms as the old.
Where the statutory procedure for obtaining an extension is used there are some quite strict procedures and timetables. These must be met if the right is not to be lost. The Landlord is also entitled to a payment for the extension. This is designed to compensate the Landlord for the loss of the ground rent and for the fact that he will have to wait an additional ninety years to recover his property. Where the unexpired term of the current lease is less than eighty years the Landlord will also receive 50% of the “marriage value” which is calculated as the difference between the extent to which the Landlord’s interest diminishes in value and the extent to which the Leaseholders interest increases in value. Calculating the amount of the payment due to the Landlord is complex. There are a number of statutory rules and assumptions and it is really essential that a professional valuer with expertise in this process be instructed to advise.
The Leaseholder begins the statutory process by serving the notice which must include the amount that the Leaseholder proposes should be paid to the Landlord. It is important to know that if the proposed sum is wholly unrealistic (for example a nominal amount) the whole of the notice may be invalidated. It is therefore not possible to serve a notice on your Landlord suggesting such a “premium”, in the hope of drawing out a response from the Landlord that will tell you how much the Landlord expects to receive.
The Landlord may serve a counter notice setting out his proposals. There will then often be a period of protracted negotiation, usually between the two party’s valuers. Either party has a right to apply to a Leasehold Valuation Tribunal to decide any terms that are in dispute. Again there are strict time limits that must be followed for such an application.
Once the terms of the new lease have been agreed if, for any reason, either party does not actually enter into the new arrangement the other can apply to the County Court to compel compliance. Once more time limits apply.
In addition to the “premium” that the Landlord is entitled to as set out above the Leaseholder will also be required to pay the Landlord’s costs, though these are limited by the legislation.
Because of the technicalities and potential costs involved in the statutory process it is quite often the case that the Landlords and Leaseholders will agree to extending residential leases, outside of the statutory scheme. This “voluntary” arrangement may be quicker and cheaper, but it does carry a number of risks.
First of all, there is no limit to the amount of the “premium” that the Landlord is able to demand, nor is there any right to go to the Leasehold Valuation Tribunal in the event of dispute. Secondly, a Landlord, usually under the guise of “modernising” the wording of the new lease, may seek to vary the terms of the lease in the Landlord’s favour. It may also be in the interests of the Landlord to drag out negotiations. The shorter the remaining term of the original Lease, the greater the “premium” to which the Landlord is entitled.
If there is an existing mortgage on the property the consent of the mortgage lender to the extension will be required. This is unnecessary where the extension is granted under the statutory scheme. It is not unusual for mortgage lenders to impose a charge for granting that consent to a voluntary extension.
Finally, quite frankly, the Landlord’s Solicitors may take the opportunity of maximising their fees as it will inevitably be part of any voluntary arrangement that the Leaseholder will be responsible for the Landlord’s legal costs.
The process of extending residential leases can be complex. You should remember that you are dealing with a very valuable asset.