When it comes to selling a property, everyone wants to make the most of what they own, whether it is by giving it a fresh lick of paint or sprucing up the garden. However, for residential tenants of long leases, there may be one further step they can take to improve the value of their property before going to market.
Lease length – why does it matter?
One of the key factors to be borne in mind when purchasing a leasehold property is how much longer the lease has left to run. Or putting it simply, how long until the keys must be handed back to the landlord.
It is easy to see how someone may be willing to pay more for a property where the lease has 200 or more years left to run, compared to a lease that has only 90 or less. For the latter, it is clear that it would be beneficial to increase the remaining length of the lease to make it a more attractive investment to potential buyers. Many buyers are hesitant to purchase a property where there are less than 85-90 years left to run on the lease. Additionally, mortgage lenders will often not lend on properties with less than 80 years unexpired.
From a valuation point of view, the “danger zone” for any lease is 80 years too. In crude terms, when a lease drops below 80 years, it becomes much more expensive to extend the term. The technical reason for this is that, at this point, an additional element is added into the valuation calculation, called marriage value.
Can a lease be extended voluntarily with the landlord?
It is certainly possible to extend a lease simply by agreement with the landlord. However, there is no certainty that a landlord will agree in the first place, and there is always the possibility that even if they do engage with the idea, it may never come to fruition. There is nothing that a tenant can to do to compel the landlord to sign on the dotted line.
What other options are there?
Fortunately, if a tenant has owned the property for at least two years (and provided all other criteria are met) they have a statutory right under the Leasehold Reform Housing and Urban Development Act 1993 (the 1993 Act) to essentially force the landlord to extend the lease. Think compulsory purchase!
A statutory lease extension adds an additional 90 years to the remaining term, and reduces the ground rent to a peppercorn (effectively nil). Both are positive selling points to a potential purchaser.
Who would handle the statutory process?
The legal framework is complex and the ramifications of not dealing with the process correctly can be detrimental. It is therefore highly recommended that a specialist leasehold enfranchisement solicitor is instructed to deal with the legal aspects. A specialist surveyor should also be instructed to provide valuation advice.
What is the first step?
The first step is for a valuation to be carried out by the specialist surveyor who will inspect and measure the property (unless the valuation can be done on a ‘desktop’ basis), study the lease, research comparable sales and then produce a lease extension calculation and report. This will confirm the likely premium payable to the landlord (to compensate them for their various losses – including marriage value if the lease has less than 80 years left to run), together with a suggested offer with which to start negotiations.
How is the claim initiated?
Once the valuation has been carried out, it’s the solicitor’s job to investigate the title structure and draft the required notice, fondly known as a “Section 42 Notice”. Amongst other things, this needs include a proposed premium, and be served on the landlord and any other intermediate landlords and/or any third parties to the lease – it is crucial that this is done correctly, as is registration of a unilateral notice at the Land Registry to protect the claim.
On receipt of the Section 42 Notice, the landlord is likely to ask for evidence of title and payment of the statutory deposit, being 10% of the premium proposed or £250 (whichever is the greater).
What next?
The Section 42 Notice needs to contain a date by which the landlord must respond – at least two months from receipt of the Section 42 Notice.
The landlord’s response must be provided in the form of a Counter Notice. Again, amongst other things, this must confirm whether or not the tenant’s proposals are accepted, and if not, counter proposals must be given. This sets the goal posts for the negotiations on valuation and any other proposals put forth by the parties.
How is the lease extension finalised?
Once the premium has been agreed between the surveyors, and the new lease is agreed between the solicitors, completion will take place in much the same way as a usual purchase – including the payment of Stamp Duty Land Tax (if applicable). Thereafter, the lease extension is registered at the Land Registry, in place of the previous lease.
If matters cannot be agreed, either party may make an application to the First-tier Tribunal for a determination on the matters in dispute – this is another benefit of the statutory process, which is not available to the parties if the lease extension is dealt with on a voluntary basis.
Costs
It should be noted that, as well as the leaseholder paying their own advisors’ costs, the 1993 Act provides that the landlord, and any other intermediate landlords, are also entitled to recover certain reasonable costs from the tenant (although not those incurred in dealing with the First-tier Tribunal).
Does the whole process need to be carried out before a property can be sold?
You will recall that, for a tenant to initiate a statutory claim for a lease extension, they need to have owned the property for at least two years. One might think therefore that this would preclude a buyer from extending their lease immediately after completion of their purchase, however this is not necessarily the case.
The solution to this problem lies in the fact that the 1993 Act allows a tenant to initiate a claim and then assign the benefit to a purchaser. The crucial thing to remember here is that the benefit of the Section 42 Notice must always be vested in the same person as the title to the property – if the two become detached, the Section 42 Notice becomes deemed withdrawn and the claim will fail.
If this process is done correctly, the assignment allows the buyer to take the benefit of the claim, stepping into the shoes of the outgoing tenant, without having to own the property for two years themselves.
How does this work in practice?
As the buyer is going to take the benefit of the lease extension claim, it usual for them to carry out most, if not all, of the leg work – this will include them obtaining a valuation report and having their solicitor draft the Section 42 Notice.
The benefit of the claim can only be assigned once the Section 42 Notice has been served, and this usually happens between exchange of contracts and completion – at least then the seller knows that the buyer is committed to purchasing the property before he commits himself, albeit (hopefully) briefly, to the lease extension process.
In light of this, both buyer and seller will need to be sure that the contract for sale adequately deals with the lease extension process, and that the appropriate assignment documentation is dealt with in readiness for completion.
We can help!
Although it is a complex procedure, if done correctly, it is a useful tool that can be utilised by a savvy seller to increase the value of their property and make it more appealing for potential purchasers.
