Lease Extension or Enfranchisement?

A lease extension which adds 90 years to your lease should be the most straightforward way to increase the term and protect the value of your flat which otherwise is a wasting asset. Over time, the premium payable to extend the lease will increase as the lease shortens. Unfortunately, many people only think of extending their lease when they are planning to sell their flat or, worse still, when their flat is under offer. Purchasers’ solicitors increasingly advise their clients to obtain a lease extension before completing their purchase to avoid uncertainty, costs and being subject to the two year qualifying period.

The cost of extending a lease increases when the remainder of the term is less than 80 years. This is due to the inclusion of marriage value which is half the net gain in value from extending the lease or enfranchising. Typically, purchasers are demanding the inclusion of lease extensions when leases have 80-90 years unexpired term, even longer in some cases.

The downside, if you are in the process of selling a flat with a short lease, is that the lease extension is likely to be purchased in a hurry and landlords will tend to take advantage of this by seeking a higher premium. It is far more sensible to obtain a lease extension well before selling your flat. However, this process can take between four and 12 months, or longer if it needs to go to a Tribunal.

An alternative to lease extension is purchasing the freehold.

If over 50% of the owners in your block wish to buy the freehold, the added advantage is that you will protect the value of your flat and transfer the management to the residents, as opposed to a landlord who may not be managing the building cost effectively or efficiently. The purchase of the freehold may, however, include other parts of the property, such as those flats not participating in the purchase or those parts of the building which could be re-developed, e.g. roof spaces, basements or grounds. The latter, in particular, are highly subjective elements which may well deter many from joining in with the freehold purchase. In this situation you should first serve a lease extension notice and then a collective notice so that if the latter is unsuccessful you can pursue the lease extension route, particularly if the remainder of the term is close to 80 years.

If control of management is the main reason for buying the freehold, there are other options available such as Right to Manage or the Appointment of a Manager.

Whilst the relevant legislation is nearly 19 years old and the valuation principles are fairly well established, the enfranchisement industry is still very imaginative in identifying new valuation and legal arguments which keep the Tribunal service and professionals busy. Even those principles which are established are now subject to change.

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Getting the right professional help early on is essential for a number of reasons:

1. So that all issues may be Identified  

2. So that a good indication of the total costs can be provided

3. To identify whether any valuation or legal includes issues may arise which are likely to go to a Tribunal or beyond

4. To provide a realistic time frame for completion

5. This is a specialised area in terms of valuation, legal issues and representation before the Tribunals, with the key to success being the appointment of a legal and valuation team which work well together.

Michael Lee is Managing Director, Shaw & Company (Surveyors) Ltd