I am frequently asked by clients whether they should go ahead and extend terms on their existing leasehold flat at present or whether to wait until the government makes long anticipated reforms to the existing leasehold law to make lease extension process “easier, faster, fairer and cheaper” as it is promised to be.
The current law
The Leasehold Reform, Housing and Urban Development Act 1993 (as amended) sets out a framework under which flat owners can ask a “competent landlord” (not always but often their freeholder) to extend their lease by an additional 90 years at a peppercorn ground rent. So long as a leaseholder has owned a flat for at least two years, the process can be started by serving a Section 42 claim notice on their landlord, setting out the proposed premium to pay for a new lease.
This premium is usually negotiated by specialist leasehold enfranchisement surveyors of respective parties and it is based upon a number of factors including the market value of the property, the number of years remaining on the leaseholder’s lease and the ground rent payable under the existing lease.
If the parties are unable to agree the terms of the lease extension then either party can apply to the First Tier (Property) Tribunal to determine these issues. Once the terms are agreed or determined the parties have four months to complete the acquisition.
Law Commission’s proposed leasehold reforms
It is proposed that the existing leaseholders will be able to extend their lease to 990 years at a zero ground rent. Marriage value, the added value that arises when the freeholder’s and leaseholder’s interests are merged, is to be abolished.
If flats continue to be sold on a leasehold basis, it will be easier for leaseholders to convert their property into commonhold, a form of property ownership with practically infinite terms on their lease terms.
The media has often portrayed these ambitious proposals as already put in practice law but the truth of the matter is that an Act(s) of Parliament would be required for the recommendations to change the current law. As to when and in what shape these recommendations will be implemented is unclear and only time will tell as to how much of the proposals will survive Parliamentary scrutiny or legal challenges that are inevitable from investors’ and landlords’ side.
Response to clients
The simplest way to respond to the clients, when asked whether they should extend their lease now or in the future, is to put myself in their shoes faced with the same dilemma. The answer to the question becomes clear right away as almost always I recommend that steps are taken now, as opposed to in the future, to protect the tenant’s valuable but depreciating asset – their flat. A lease extension becomes particularly essential if a lease term approaches the dreaded 80 years as when the lease term drops below 80 years then a marriage value is taken into account when calculating a payable premium.
It is estimated that the proposed reforms will be put in practice in the next 4-5 years and when they come into force we do not know if the existing leaseholders will benefit from the change in law. The proposed reforms are likely to be fairer and cheaper for new flat owners but it is yet to be seen whether the radical changes will also apply to the existing leasehold properties.
Tornike Purcell, Consultant Leasehold Enfranchisement Solicitor at Setfords Solicitors