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Lease Extension Process

This guide provide an overview of the lease extension process and how it is carried out in straightforward cases.

What is your Right?
As a flat-owner, you have the right to purchase at market value a new lease equal to the unexpired term of the current lease plus 90 years at a peppercorn (i.e. nil) ground rent. (See below on how the purchase price is determined.)

What Conditions need to be met?
In a nutshell, there are 3 major conditions:
1. The property must be a flat used for residential purposes, although it may include any garage, outhouse, shed, garden, etc.
2. The flat-owner tenant must hold a long lease at low rent (usually called ground rent).
3. The flat-owner must have owned the flat for at least 2 years.  The flat-owner need not live at the flat (this requirement has been abolished).

So how can you Extend your Lease?  What is the Lease Extension Procedure?
Importantly, the law puts the flat-owner tenant in the driving seat.  The following are the usual main stages.

Stage 1 – The flat-owner issues a Tenant’s Notice of Claim
The flat-owner starts off the process of claiming entitlement to a new or Extended Lease by issuing a Notice of Claim to the freehold-owner.  This form must contain specific information as set out in the Leasehold Reform Act to be valid.  The flat-owner will be responsible for the freehold-owner’s costs as well as his own.

The freehold-owner has rights including, in order to value his interest in the flat, to have right of access to the flat at a reasonable time and upon giving 3 days notice.  Further, the flat-owner may be required to pay a deposit of 10% of the premium proposed in the Notice of Claim.

The effect of a valid Notice of Claim is equivalent to that of a contract for a new Extended Lease between freehold-owner and flat-owner.  Thus, in the case of default by either party in respect of their obligations, the remedies are the same as if there were a breach of contract.  Once a qualifying flat-owner tenant validly gives a Notice of Claim, then the freehold-owner is bound to grant a new Extended Lease to the flat-owner and the flat-owner is bound to accept it.  The new Extended Lease will be substituted for the existing lease for a term expiring 90 years after the date of the existing lease.

Stage 2 – The freehold-owner issues a Counter Notice
In the normal course of events, the freehold-owner will issue a Counter Notice which (assuming the Notice of Claim has been validly served) will state that the freehold-owner admits the flat-owner has the right to acquire a new Extended Lease but may seek to negotiate on some of the terms, including the proposed price payable for the new lease.

If no counter notice is issued, then the flat-owner can apply to court to have the terms of the lease extension fixed and require the freehold-owner to complete.

Stage 3 – Agree terms
A six-month period is set aside for this stage, during the first two months of which the parties are expected to enter into serious negotiations.  A qualified 1993 Act valuer (surveyor) will usually be required to undertake this stage.

If negotiations are not proceeding successfully, application must be made by the flat-owner to the Leasehold Valuation Tribunal within the permitted six-month period.

Freehold-owners are likely to seek to avoid LVT proceedings as they usually cannot reclaim their LVT costs from the flat-owner.

Stage 4 – Exchange contracts and complete lease
Once the terms are agreed, the contract and / or the new Extended Lease must be entered into within 2 months.  If not, the flat-owner has a further 2 months in which to apply to court requiring the freehold-owner to comply.

Finally, the new lease must be registered at the Land Registry.

Price Payable to the Freehold-owner
Once again, this is set out in statute.  The price payable by the flat-owner in respect of the grant of the new Lease is the aggregate of the following:-

1. The diminution in value of the freehold-owner’s interest in the tenant’s flat.  This is the difference between the freehold-owner’s interest in the flat prior to the grant of the new lease and its value once the new lease is granted.

2. The freehold-owner’s share of the ‘marriage value’.  The marriage value is the difference between the aggregate of the values of the interests of all parties before the grant of the new lease and the aggregate of the values of those interests after the grant of the new lease.  The flat-owner must pay to the freehold-owner one half share of the marriage value.  Importantly, where the unexpired term of the existing lease exceeds 80 years the marriage value shall be taken to be nil. 

3. The amount of any compensation for loss arising from the grant of the new Extended Lease payable to the freehold-owner.  This refers to any resulting loss or damage to the freehold-owner to the extent that it is referable to the freehold-owner’s ownership of other interests e.g. loss of development value.  This does not apply in most cases.

What if I have a Mortgage?
This is also dealt with under statute.  Even if it were not, lenders are generally happy to co-operate because their security is being strengthened.  However, it is a complication which must be dealt with.  What needs to be achieved is that your lender accepts that their existing mortgage will be transferred from the current lease to the new Extended Lease, which can be done by way of a Deed of Substituted Security.  Your lender will require that their position be protected in the usual manner by priority protection followed by registration at the Land Registry.

Leasehold Advisory Service
The Leasehold Advisory Service is an excellent source of further information on the Lease Extension process.

Assumptions
The following assumptions apply to the above information:

1. There are no intermediate leases i.e. this is a straightforward situation with one freehold-owner (landlord) and one flat-owner (tenant).

2. The flat-owner owns only one flat in the building.

3. There is no collective enfranchisement (i.e. collective purchase of the freehold) currently in progress.  You can read further on the right of flat-owners to buy their freehold

If you receive a notice from your freehold-owner, take formal advice as soon as possible because there are strict time limits imposed.

Call 01223 417200 and ask for the Residential Conveyancing Team