QUESTION
I have an enquiry on lease extensions and variation, on which guidance would be more than welcome.
Our block of 114 flats is owned by the leaseholders via a company which holds both the freehold and the head lease. A second leaseholder company, an RTMC, appoints the Managing Agents.
When we acquired the head lease some years ago, one of the objectives was to extend the underleases. However there was no urgency as there is still 120 years approx left. The under leases expire at the same time as the head lease, so the building will revert to the freeholder in 120 years time. The ground rent is one peppercorn.
For those of us involved as leaseholder directors we wonder whether it is possible, and/or desirable to extend the leases to 999 years now, or whether to leave some room to manoeuvre for future leaseholders. We keep receiving letters from financial organisations offering to buy our company, so we know there must be quite a lot of value tied up in the present arrangements.
If we did decide to extend, would we need to have a whole new lease, or could we vary the existing one? If the latter, could we make additional minor variations too? Our leases were written prior to the enactment of the C&LRA 2002 and there are some anomalies, including an embedded MA as a third party, which is why we had to exercise the RTM in the first place.
ANSWER
Should you extend the leases?
You have asked whether it is possible or desirable to extend the leases to 999 years now, in particular as the leases still have 120 years left to run. Whether to extend now or later depends largely on what you want to achieve both as freeholders and as leaseholders. Extending the leases to 999 years at this stage will likely result in an increase in value of each leaseholder’s leasehold interest as a lease with a longer term to run is a more valuable asset. The fact that each leaseholder owns a share of the freehold will also be attractive to prospective purchasers. As freeholder, you can receive a premium for each of the lease extensions and this can be used to fund improvements to the block, or be put into a sinking fund. You may decide not to charge for the lease extension, but this may prove problematic if not all leaseholders want to participate.
If you are considering selling the freehold interest in the future, it may be more attractive to prospective purchasers if there is potential for the incoming freeholder to receive the premium from the lease extensions in the future. However, as the ground rent is only a peppercorn, the premium for a lease extension may be quite low. A valuation expert could advise further on this. You should also remember that as you have chosen to enfranchise and have the freedom to manage your block yourselves, you will need to consider if you would want to sell the freehold and what you would do if the incoming freeholder proved to be difficult to work with.
If you are planning to dispose of the freehold, you may need to offer the leaseholders the right of first refusal, even though they are participants in the freehold company. In order to fully advise on this, further information would be needed and the lease would need to be reviewed.
Varying the terms of the lease
When a lease is extended using the statutory route, the existing lease is surrendered and a new lease is granted which includes any necessary modifications as a result of legislative changes. Where the lease extension process is voluntary, as this would be, you are able to make variations to the leases beyond the usual statutory updating. However, the lease extension is not a unilateral process, so the lease could only be varied if the leaseholder also agrees to the variation. The lease can be varied by a deed of variation or a surrender of the existing lease and grant of a new lease and which is preferable will depend largely on the number of variations that are proposed.
I would recommend that you obtain legal advice from a law firm with expertise in lease extensions prior to varying or extending the leases.
Sarah Taylor, Associate at Royds Withy King
