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INFORMAL LEASE EXTENSIONS – THE BENEFITS AND THE RISKS

Tuesday, 12th February 2019 | by: Justin Burns

Leaseholders have the right to extend their leases under the Leasehold Reform, Housing and Urban Development Act 1993. Under the 1993 Act leaseholders are entitled to a 90 year lease extension and a reduction of their ground rent to a peppercorn. In return they must pay their freeholder compensation, call a premium.

The statutory process involves serving a legal notice on the freeholder, waiting up to two months for a counter-notice from the freeholder, and then negotiating the premium payable which, if unsuccessful, can see the claim culminating in a Tribunal hearing. It’s a complex process, so leaseholders will typically require assistance from a surveyor and a solicitor. Once the leaseholder serves notice they also become liable for the freeholder’s legal and valuation costs. The process can be lengthy and the professional fees steep.

It should therefore be no surprise that leaseholders are often keen to explore the possibility of extending their leases informally i.e. by agreement with the freeholder. In some cases an informal deal will make sense for both parties, who will each benefit from avoiding the long-winded statutory process, and from more flexibility over the terms of the new lease. This often works well for leaseholders who are on good terms with their freeholder, and/or when the lease has a fairly long unexpired term.

However, when a lease is extended informally the parties are not bound by the provisions of the 1993 Act and potentially all of the terms of the new lease are open for negotiation. This creates a situation which is open to abuse by unscrupulous freeholders, particularly when the leaseholder does not have access to adequate professional advice. Its not uncommon for informal lease extensions to be negotiated on the basis of a shorter extension with some ground rent retained.

This is not, in and of itself, inherently problematic; there is nothing wrong with a freeholder wanting to retain some value in his investment, and a shorter lease extension for less money may well be appealing to the leaseholder, particularly if they aren’t planning on owning the property for a very long time. However, cases are sometimes reported of freeholders selling lease extensions with punitive ground rents, or rents which are subject to onerous review provisions (such as doubling every 5-10 years). In some cases, the premiums paid for these problematic lease extensions are actually higher than those that would have been due if a formal claim had been made under the 1993 Act. The results can be disastrous, with the properties in question becoming un-mortgageable and unsaleable.

If you are considering approaching your freeholder to discuss the possibility of extending your lease on an informal basis, obtaining proper professional advice from a specialist surveyor and solicitor is a must. If you are on good terms with your freeholder it might be worth asking whether they would be willing to jointly instruct a surveyor to advise on the premium payable. That same surveyor could also provide advice on any bespoke proposals, such as a shorter lease extension with some ground rent retained in exchange for a smaller premium, thereby ensuring the deal doesn’t have a negative effect on the future value or saleability of the property. Recently, our Chartered Surveyors have worked on a number of cases on an impartial basis, jointly instructed by the freeholder and leaseholder. This informal approach allows both parties to feel assured that their interests are being properly cared for without entering an adversarial process involving two different valuers.

Whatever your situation our team of Chartered Surveyors are on hand to help. You can contact the team on 020 8546 7211 or by email.