Short leases and lease extensions

The following information is for guidance only and should not be used as a substitute for obtaining professional legal advice.

Most flats and maisonettes (and some houses) in England are held on a leasehold tenure. In contrast, most houses are held on a freehold tenure.

The owner of a leasehold interest is legally entitled to use and enjoy the leasehold property for the duration of the lease ie for the amount of years remaining on the lease. When the lease expires at the end of the lease term, the legal title of the property will revert to the freeholder. During the life of the lease, the leaseholder will also have to pay an annual ground rent to the freeholder as legal recognition for the fact that the leasehold flat or maisonette is located on land (or ground) held by the freeholder. The leaseholder will also be bound by the terms set out in the lease.

In legal theory, at the end of a lease term, the leaseholder will lose possession of the flat or maisonette, as it will revert to the freeholder. As this situation would be unjust to the leaseholder, legislation is in place, to allow the owner of a short lease (generally considered to be for a remaining term of less than 90 years) to apply to the owner of the freehold (the freeholder) to grant an extension of the lease term, in return for a premium (or sum of money payable). Alternatively, the leaseholder can apply to purchase a share of the freehold (along with a majority of the other leaseholders in the same building). Once the freehold has been collectively purchased, the leaseholders can then grant themselves an extended lease (typically for 999 years).

In practice, the latter option can prove difficult and so individual lease extensions are more common. There are two ways of extending a short lease – the informal agreement route or the formal statutory route.

The informal agreement route is where the leaseholder applies to the freeholder for a lease extension and the two parties privately agree a lease extension for an agreed sum of money. This method can be convenient and fast. However, there are several disadvantages to using this method. Namely, the freeholder will usually offer a relatively short lease extension (often to bring the existing lease up to a total of 99 years, for example 85 year existing lease + 14 year extension = 99 years), the premium demanded can be excessive and does not have to be justified by the freeholder, the freeholder will usually make detrimental changes to the annual ground rent payable (usually it will be increased along with other changes to the future review structure) and changes may also be made to other lease terms.

The formal statutory route is where the leaseholder applies for a lease extension using the relevant legislation (mainly the Leasehold Reform, Housing and Urban Development Act 1993, as amended). This method requires the leaseholder to instruct a suitably experienced and qualified Surveyor to calculate the lease extension premium that should reasonably be paid to the freeholder in return for a lease extension. The services of an experienced legal adviser will also be necessary. While this method of extending the lease is more cumbersome and time consuming (the process can take up to a year to complete) when compared to the informal agreement method, it has a number of important advantages. Namely, the lease extension will be for a statutory 90-year term on top of the existing lease (for example 85 year existing lease + 90 year extension = 175 years), the premium is calculated by negotiation between the parties using a statutory formula and no other changes are allowed to the ground rent or the other lease terms.

The formal statutory method of extending a lease is preferable to the informal agreement method for all of the above reasons. However, many leaseholders are not aware of the statutory protections offered by the legislation and end up agreeing inflated premiums with the freeholder. In other cases, a leaseholder wishing to sell their property, often agree to a pay an inflated premium, so that the property is more marketable as it can be sold with a quickly agreed (but costly) lease extension. However, a leaseholder with a short lease who wishes to sell the property can initiate the formal statutory lease extension process and then either assign the benefit of initiating the process to the new purchaser or agree to complete the whole process (including the eventual payment of the premium) on behalf of the new purchaser. The advantage of initiating the lease extension process prior to a property sale, is that the property is considered more attractive to a prospective purchaser. Otherwise the new purchaser would have to wait for a two-year period of legal ownership, before they can legally extend the lease using the formal statutory method. As a result of the two further years that would have elapsed, the lease extension premium would normally be higher.

The formal statutory lease extension process requires that the owner of the short leasehold has been a legal owner for at least two years. The owner will first need to instruct a competent RICS qualified Surveyor to inspect the property. The Surveyor will then calculate the approximate premium that should reasonably be paid to the freeholder in return for the statutory 90-year lease extension. The Surveyor will then enter into negotiations with the freeholder in order to agree a premium. These negotiations can take up to 12 months to complete. The services of an experienced legal adviser will also be necessary. The Surveyor will deal with the property inspection, valuation, calculation of the premium and the subsequent negotiations with the freeholder. The legal adviser will work in tandem with the Surveyor and serve the various legal notices on the freeholder. When the premium amount has finally been agreed, the legal adviser will be responsible for the property conveyancing and associated legal work.

Survey Homes KOS Ltd provide a Lease Extension Valuation Report (LEVR). The fee quoted for this service includes the inspection of the subject property, the calculation of the lease extension premium and the subsequent negotiations with the freeholder until such time as a premium has been agreed. The Surveyor will need to inspect the lease documents to ascertain the exact remaining lease term and the ground rent provisions, as these are used in the calculations.

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