UK: Leasehold Houses And Flats In London: The Rights Of Companies, Trustees And Other Lessees To Extend Leases And Acquire Freeholds

Last Updated: 21 January 2013
Article by Andrew Slatter

Background

The Leasehold Reform Act 1967 gave rights to the lessees of houses to extend their leases or acquire the freehold. The Leasehold Reform, Housing and Urban Development Act 1993 gave rights to the lessees of flats to extend their leases and/or collectively acquire the freehold with their co-lessees. Until 2002 these rights did not apply to companies and other non occupying lessees of leasehold houses and flats (for example trustees). This was because there was a residence test requiring lessees to have occupied the house or flat as their main residence for varying periods of time. A company was considered unable in law to reside at a property, and therefore unable to satisfy the residence test. Trustees rarely satisfied the residence test.

The Commonhold and Leasehold Reform Act 2002 abolished the residence test and replaced it with a two year ownership requirement. Thus companies and other non occupying lessees now enjoy the same statutory rights as all other lessees: having owned a leasehold house or flat for two years, they can approach the landlord and require a lease extension, or a transfer of the freehold interest. It has always been the case, and remains the case, that the lease concerned must be a long lease i.e. for a term exceeding 21 years when originally granted. It does not matter if there are fewer than 21 years left to run.

Flats

Once a lessee of a flat has owned it for two years, he is entitled to require the landlord to grant a 90 year extension to the existing lease. By way of example, if the lease has 30 years left to run, the new lease will be for a term of 120 years. Any ground rent payable will be reduced to one peppercorn per annum.

The calculation of the price payable to the landlord for the lease extension can be complex, and has always included three components:

  • the reduction in the value of the landlord's interest in the flat as a result of the lease Extension
  • an element of the "marriage value", and in some circumstances
  • compensation.

The 2002 legislation made significant changes to the marriage value calculation in favour of lessees so that:

  • the lessee only has to pay 50% of the marriage value rather than at least 50% of the marriage value
  • the lessee does not have to pay any marriage value if the unexpired term of the lease is 80 years or more, as at the date of claim for a lease extension.

Additionally, since 2002, the valuation date is fixed as at the date on which notice is given to the landlord of the claim to extend the lease. Thus any delays in the lease extension process thereafter will not result in an increased price due from the lessee, particularly in a rising market. It follows that in the current falling market, a lessee may wish to delay serving a Notice of Claim until he perceives that the market has bottomed out. He will have to remember however that while waiting for the market to bottom out, his existing lease will become shorter and this will have the opposite effect on the price he ultimately pays for his lease extension. It is the job of a qualified valuer to identify the optimum time for service of the Notice although of course no valuer will be able to guarantee movements in the market one way or the other.

Once a Notice of Claim for a lease extension has been served on the landlord, there is a strict statutory timetable for negotiation of the price payable and, in the event that agreement is not possible, referral of the matter to the Leasehold Valuation Tribunal.

Most lease extensions will be agreed and completed within a period of approximately 9 months, or earlier with the parties' agreement and co-operation. Referrals to the Leasehold Valuation Tribunal are relatively rare.

A lessee can also participate with his co-lessees in a collective acquisition of the freehold. This will enable lessees to extend their own leases and to take control of the management of the building. In general terms a collective acquisition must be taken forward by no less than one half of the qualifying lessees in a building. In reality it is often difficult to achieve a 50% consensus on a collective acquisition, and even if such consensus is achieved, the 50% will still be faced with the task of raising 100% of the freehold price. For this reason, many lessees choose to go down the lease extension route, which is something they can do unilaterally in order to ringfence their own investment.

Houses

Once a lessee of a long leasehold house has owned it for two years, he is entitled to claim a lease extension (of 50 years), or the freehold. Again the share of marriage value has been fixed by the new legislation at 50% and no marriage value at all is payable where the lease has an unexpired term in excess of 80 years. The lease extension option is in practice virtually defunct as the acquisition of the freehold will invariably represent infinitely better value for money.

Why should lessees and their advisers be interested in these rights? The shortening of any long residential lease has a depreciating effect on it. This depreciation accelerates the shorter the remaining term becomes. The right to require landlords to extend leases and transfer freeholds:

  • stops the depreciation process and enables reinvestment in the property
  • averts a situation where prospective purchasers of houses and flats are put off because the lease is so short and/or because they cannot find a lender prepared to lend on security of such a short lease
  • protects the value of dependants' inheritance.

In short, this is a statutory opportunity to re-invest in a property, and to tackle the natural disinvestment of a shortening lease.

Happily, many lease extension premiums come in below the lowest Stamp Duty Land Tax threshold (currently £125,000) and thus this additional expense is avoided.

How Charles Russell can help?

We have an experienced team of property lawyers who have worked for many years within the framework of this area of the law.

We have direct contact with valuers qualified to give prompt and practical advice on all valuation aspects, enabling lessees' claims to be taken forward effectively and efficiently. Additionally we are able to advise owners on the tax implications arising from leasehold enfranchisement.

The first step

The first step is for us to instruct and ascertain from a valuer the likely sum which will be payable in respect of the proposed lease extension or freehold acquisition. We can then advise lessees on the likely total costs of the exercise, including Stamp Duty Land Tax, Land Registry fees and the legal and valuation fees involved. With this information lessees will be in a position to make an informed decision whether to proceed with the lease extension or freehold acquisition.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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