Short Leases: Opportunity or too risky?  

• An additional 90 year term to the unexpired term; and

• A lease on exactly the same terms as that which you have at the moment (subject to minor up-dating);  and

• all for a “peppercorn rent” (i.e. nil rent for the remainder of the term).  

Generally speaking, to exercise the right under the Act you must have a lease originally granted for a term of more than 21 years and you must have held your lease for at least two years.  

PROCEDURE

To start the claim it is necessary to serve the landlord with a formal notice setting out the terms you propose for the lease extension including the premium you are willing to pay.  Serving the notice of claim triggers a strict timetable which is set out in the Act.   

WHY SHOULD THE LEASE BE EXTENDED?

As the number of years left on a lease decreases, a lease becomes harder to sell and it may be difficult to raise a mortgage on the property.  In addition, most lenders are reluctant to lend against leases where the unexpired term is less than 75 to 80 years. A lease extension makes the property more marketable and widens the market of buyers (and lenders).

THE PREMIUM: HOW MUCH WILL IT COST?  

 
The “premium” is a one-off payment payable to the landlord (and any intermediate landlords) in return for the new lease.

When marriage value (see below) is payable the lessee will be faced with an escalating price.  First, because the shorter the lease, the greater the landlord’s interest.  Secondly, because the price paid takes into account the value of the flat and these usually increase year on year.  

In broad terms as the length of the unexpired term of a lease gets shorter, the premium payable to extend the lease increases.  If a lease has less than 80 years unexpired then the price payable to the landlord is uplifted by one half of the “marriage value” which could be substantial.  Leases with less than 80 years remaining are very common in Prime Central London.

“Marriage Value” – what is it?

The concept of marriage value is complex.  In broad terms, it is the value of the flat when extended less the aggregate of the value before extension and the value of the landlord’s interest before extension. It is often mis-quoted as the difference between the value of the existing short lease and the long leasehold value but this takes no account of the landlord’s interest and is wrong.   

Therefore, property valuations are highly significant when it comes to lease extensions and leaseholders may sometimes be able to take advantage of low property market values.     

SELLING A FLAT WITH A SHORT LEASE

If a qualifying tenant is selling a flat it is possible for them to serve a notice for a lease extension after contracts for the purchase of the property have been exchanged and then assign the benefit of the notice to the buyer on completion of the purchase.  This deed of assignment enables the seller to step into the shoes of the buyer on completion.  If this is not done the buyer will have to wait two years before being able to serve a notice and that could significantly increase the price, particularly in Prime Central London.   

This invariably assists with the marketability of the property but great care should be taken with the drafting of the documents as a mistake in the documentation can have a detrimental effect on the incoming buyer.  In other words, having to wait a further two years with a short lease in Prime Central London could turn out to be an expensive business! If the notice and assignment are drafted and served correctly the investments could reap great benefits – see below some real life case studies.

CASE STUDIES:

FLAT IN BRYANSTAN MEWS, W1

The matter was a statutory lease extension claim.  Purchasers bought the property under a sub-sale.  In other words, the Section 42 Notice to extend the lease was assigned twice.  The property was bought in October 2012 for £1.4 million with an unexpired lease of 71 years.  The costs of the lease extension was agreed at £115,000.  The property with the extended lease was sold in May 2013 for just over £2 million.

FLAT IN WEST MORELAND STREET, W1

Flat was purchased in February 2012 for £970,000 with an unexpired lease term of just under 50 years. The premium for the lease extension was agreed at £210,000.  The flat if on the market in August 2013 could be sold for c£1.6 million.

HEALTH WARNING:

Whilst the consequences of things going wrong can be disastrous, with the right specialist advisors on board the benefits can be extremely rewarding!  

Opportunity or too much hassle…?

Yashmin Mistry is a Partner, JPC Law