UK: Enfranchisement – Lease Extensions Of Individual Flats

Last Updated: 15 April 2013
Article by Rhiannon Saunders

Any party with an interest in a long leasehold property, either as the freehold owner of a building consisting of long leasehold properties, or as a tenant of a long lease, should be aware of the right of a “Qualifying Tenant” to acquire a new extended lease of their property (adding 90 years to the unexpired term).

This is particularly relevant at present as it is a buyer’s market and a Tenant will want to make their property as attractive as possible if they are looking to sell. Extending their lease by 90 years is one way to improve the property in the eyes of a buyer, especially if the flat has a term of less than 80 years remaining as it then becomes difficult to secure a mortgage, in a market when mortgages are still proving difficult to obtain (and marriage value becomes payable, which is discussed further below). The ability to obtain a mortgage differs between lenders, but when a lease term reaches 60 years or less unexpired, it may be impossible to secure a mortgage on the property at all.

The default position is that, if a tenant requests a new lease, the landlord shall be bound to grant to the tenant and the tenant shall be bound to accept a new lease of the flat for a term expiring 90 years after the date of the existing lease (Section 56 Leasehold Reform Housing and Urban Development Act 1993 (LRHUDA 1993)). The purpose of this article is to examine what rights an individual tenant has to request a new lease adding 90 years to their unexpired lease term.

Qualifying Criteria

Prior to requesting a new lease, the tenant must first consider whether they qualify for a lease extension. Further, if a landlord receives an application for a lease extension, they must consider whether the tenant is actually entitled to make that application. The following conditions must be considered:

1) Is the tenant’s flat in a building which is excluded from the right to a lease extension?

Buildings excluded from the right to a lease extension are:

  • Crown properties (although the Crown may consider granting a lease extension);

  • Certain National Trust properties;

  • Properties within cathedral precincts.

2) If the tenant’s property is within a qualifying building, can the tenant satisfy the following criteria?

  • the original lease granted to the tenant was for a term exceeding 21 years;

  • the landlord is not a charitable housing trust providing the flat for the purpose of charitable functions;

  • the lease does not relate to a business tenancy.

If the tenant can satisfy the above they will be entitled to apply for a lease extension if they have owned their lease for at least two years before serving notice requesting the new lease.

The Tenant’s Application

If the tenant satisfies the qualifying criteria, they are entitle to serve notice on their landlord requesting a new lease for a term equal to the unexpired residue of the existing lease plus 90 years. The notice should comply with section 42 LRHUDA 1993:

  • The notice must be given by the tenant to the landlord and any third parties’ to the tenants’ lease;

  • the notice must state the tenant’s full name and address of the flat which is the subject of the new lease request;

  • the notice must include the date on which the lease was entered into, the terms for which is was granted and the date of commencement of the term;

  • specify the premium the tenant proposes to pay in respect of the new lease and proposals in relation to any other amounts the tenant may be required to pay;

  • specify any new lease terms sought

  • state the person (if any) the tenant has appointed to act on their behalf and include their address (which is to be an address in England and Wales at which notices can be served)

  • specify the date by which the landlord must respond with their counter-notice (which must be not less than two months following the date of service of the tenants’ notice)

The Landlord’s Response

On receipt of a notice from the tenant requesting a new lease, the landlord must firstly consider whether the tenant has the right to request this lease extension at all. On the assumption that the tenant does qualify for a lease extension, the landlord is bound to grant the extension on receipt of the premium to be agreed between the parties or if not to be the subject of proceedings in the Leasehold Valuation Tribunal.

It is usual for the Landlord to file a counter-notice pursuant to section 45 LRHUDA 1993 setting out their own proposals for the new lease. This counter-notice must either:

  • admit that the tenant has a right to acquire a new lease of their flat;

  • object that the tenant has a right to acquire a new lease of their flat and state why (for example, the qualifying criteria has not been met by the tenant);

  • state either of the two options however including a notice to the tenant that the landlord intends to redevelop the premises and will be making an application for an order that the right to acquire a new lease shall not be exercisable by tenant and that the tenant’s s.42 notice shall cease to have effect.

On the basis the landlord does not object to the tenant’s request for a new lease, the counter-notice must also include:

  • the proposals stated in the tenant’s notice which are not accepted; and

  • the landlord’s counter-proposals including the landlord’s suggested premium sum and any other terms.

The landlord has the right to request the tenant pay 10% of the premium proposed by the tenant .

It is also worth noting that as the landlord is obliged to grant the lease extension, the tenant has an obligation to pay the landlord’s Section 60 costs in relation to the costs incurred by the landlord.

It is important for the both the tenant and the landlord to instruct a specialist solicitor and surveyor who have experience in negotiating lease extensions to ensure the premium requested is at the right level and can be justified in the negotiations which will commence following the counter-notice being served.

If the parties are unable to reach an agreement for the terms of the new lease through negotiations the either party is entitled to make an application Leasehold Valuation Tribunal (LVT) for the terms to be determined by the Tribunal.

Further considerations

The main reason why a tenant may wish to request a new lease would be to increase the value of their property as the reduction of time left on a lease also reduces the value of the flat. There are, however, further points which a tenant should bear in mind if they are considering applying for a new lease:

  • No marriage value is payable on a lease with 80 years of more left to run. Marriage value represents an additional amount which the tenant would have to pay as part of the premium to extend a lease with less than 80 years remaining on the term.

  • It is likely to be more difficult (if not impossible) to obtain a mortgage if the lease has less than around 60 years left to run, which may put off potential purchasers.

  • If the lease has less than 5 years left to run the landlord is entitled to apply to court for an Order preventing the tenant from exercising their right to request a new lease (although the landlord would have to prove they have an intention to substantially redevelop the property and need possession of the property to do so).

Summary

If you own or manage any long leasehold properties, or freehold properties which contain long leasehold flats, it is important to bear in mind the rights available to Qualifying Tenants to request a new lease (by adding 90 years to their existing lease) further to the Leasehold Reform Housing and Urban Development Act 1993, especially if the remaining term of the lease is approaching 80 years or less.

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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