After 8+ years in the property game, I’ve realised it’s all about continuous education. It’s a fantastic industry but there are so many approaches to it that it can be hard to choose your path. My best advice for any property investor is to ‘focus’, find one main strategy and become the best you can be, at it.
Learning the lease extension process is a fantastic strategy and done right will see you unearthing some real goldmine investments that other investors simply pass over because they don’t ‘understand them’ and think they’re too complicated.
Now it might seem like a complicated process, but with the right lease extension advice, you’ll start to notice deals you never thought possible…
Katie Cohen from Child & Child is an expert in this area.
So to dig a little deeper in to this process I’ve asked Katie to give an overview of how it all works along with some great tips and advice to point you in the right direction on how you can start using statutory lease extensions as part of your property strategy (and what to look out for).
Over to you Katie…
Buying and Selling Short Leases
Buying and selling short leases can be a complex concept for many to understand. This article provides an overview of the statutory lease extension process and outlines how this is possible in the context of a purchase or sale.
OVERVIEW OF THE STATUTORY LEASE EXTENSION PROCESS
The Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”) enables tenants to extend their lease by 90 years in addition to the unexpired term of their lease at a peppercorn ground rent (i.e. nil) in return for a premium.
As the length of the unexpired term of a lease gets shorter, the premium payable to extend the lease increases. If a lease has less than 80 years unexpired then marriage value is payable to the landlord which could be significant. A tenant may also encounter difficulties if they want to sell their flat and the unexpired term is considered un-mortgageable. Each lender has different criteria but generally, they require an unexpired term of at least 70 years.
How do I Qualify?
- the flat must be held under a long residential lease (i.e. granted for a term of more than 21 years);
- must have been owned for more than 2 years (i.e. registered in the tenant’s name at the Land Registry for at least 2 years prior to the service of any notice);
What does not Qualify?
- a business lease; or
- the landlord is a charitable housing trust and the flat is provided by the charity as part of its charitable work; or
- the building within which the leasehold flat is located within a precinct boundary of a cathedral; or
- the building is built on land held by the National Trust; or
- the building is owned by the Crown (except in exceptional circumstances beyond the scope of this article)
What is Marriage Value?
Marriage value is payable when the existing lease has a term of fewer than 80 years remaining. Broadly, it is the potential for increasing the value of the flat arising from the grant of the new lease. The Act requires that this “profit” is shared equally between the landlord and the tenant. The valuers will rely on local knowledge and experience to assess the increase in value in the flat arising from the new lease.
How is the Premium Calculated?
The premium to be paid for the lease extension is calculated using valuation formulae which is complex but primarily based on compensation for loss of ground rent and the length of the unexpired term. As stated above, the marriage value will increase the premium if the lease has less than 80 years remaining.
Once valuation advice, the process is initiated by the service of a Section 42 Notice (“the Notice”).
There is no standard form and it is essential that all details are completed fully and correctly and spellings should, of course, be checked. Mis-descriptions or inaccuracies should be avoided as this may invalidate the Notice.
The Notice triggers the statutory process and the tenant will be liable for the competent landlord’s reasonable and recoverable costs as from the date that the Notice is served. The “competent” landlord is that company or individual that has the legal standing to grant the new 90-year lease extension.
The Notice should state that the response date is not less than 2 months from the date that it was served. It is imperative that the registered proprietors of the flat sign the Notice personally. It cannot be signed under a power of attorney. If the tenant is a company, that company must ensure that the Notice is served in accordance with its company constitution.
The service of the Notice fixes the valuation date as at the date of the notice. This is the date when the variables affecting the price are set, such as the unexpired term of the lease, the present value of the flat and its assumed future value.
The competent landlord’s solicitor will acknowledge receipt usually without admitting the validity of the claim at that stage. Up to date office copy entries of the leasehold title, a coloured copy of the lease and the statutory deposit will be requested, representing 10% of the premium inserted in the Notice.
The counter-notice must be served no later than the response date. If no counter-notice is served, the tenant is entitled to acquire the lease extension on the terms set out in the Notice. The counter-notice should specify whether the claim is admitted. Common reasons for the claim to be denied are if there are inaccuracies in the notice, if the premium offered in the notice is unreasonably low or where the property has not been owned and registered at the Land Registry for a period of 2 years.
The tenant’s valuer and the competent landlord’s valuer have a period of 2 months from the service of the counter-notice before an application can be made to the First-Tier (Property Chamber) Tribunal (“the FTT”). The mere act of lodging an application can encourage settlement between the parties.
It most instances statutory lease extension claims are resolved by negotiation. In a minority of cases, the matter can be referred to the FTT for a determination as to the premium payable. The tenant is not liable for the landlord’s costs in respect of any proceedings before the FTT, except where the LVT determines that an application should be dismissed or one party has acted unreasonably. There is no fee payable to the FTT for making an application and it can be made by either party.
How Do I Sell My Flat With A Short Lease?
If a tenant selling a flat is willing to serve a Notice on the landlord to acquire a lease extension and to assign the benefit of the notice to the buyer upon completion, an experienced firm is needed to act for each party. A seller willing to serve a Notice will find that this greatly assists saleability.
Service of a Notice upon the competent landlord, who will in most cases be the freeholder, is undertaken commonly after exchange. Upon completion, the seller and buyer execute a Deed of Assignment of the Benefit of the Notice. This is not the same as a Deed of Assignment. The Deed enables the buyer to step into the seller’s shoes upon completion and continue with the lease extension process as if the buyer had owned the flat for 2 years.
I Want To Buy A Flat With A Short Lease, Can I Extend The Lease At The Same Time?
Ideally, a prospective buyer is looking to buy a leasehold title which has 83 years or more unexpired on its term so that they are in a position should they choose to do so following completion to apply for a lease extension or acquire the freehold. Note that they would need to wait for 2 years from the date of registration at the Land Registry should they decide to extend the lease after the purchase of the property.
If a prospective buyer is looking to buy a leasehold property which has between 80 and 82 years unexpired on its term or indeed less than 80 years, it is advisable to ascertain whether the seller of the property is in a position to serve a Notice on the competent landlord to extend the lease (or acquire the freehold) and to assign the benefit of that Notice to the buyer on completion.
— by Katie Cohen
— email: firstname.lastname@example.org
— tel: 020 7201 1865
Leasehold Enfranchisement Partner
In conclusion, any property strategy will require a certain level of knowledge to be successful.
Buying and selling with short leases is no different and is a relatively straightforward process so long as the right professionals with the experience to deal are engaged.
This is essential to ensure that the buyer of a short lease can take the benefit of a Notice upon completion of the sale without the need to wait the statutory 2 year period.
The implications for serving an invalid Notice or not serving the correctly drafted Deed of Assignment of the Benefit of the Notice can be costly both in terms of time and cost. In short, take the right professional advice and use a qualified lease extension solicitor.