Home ownership is a complex matter. Often, the legal terms thrown around can be confusing and complicate the decision-making process. When you are ready to join the property ladder, or are climbing to the next rung, you should know the difference between the forms of legal ownership: freehold and leasehold.
With a leasehold property, you only own it for a set period (as set out in the lease). Leasehold enfranchisement is the process you go through to either extend your lease, or purchase a share of the freehold (collective enfranchisement).
On the other hand, if you own the freehold, you do not have to go through any such process – you own the building and the land outright. In other words, unless you decide to sell, you own the property forever.
When you buy a leasehold property, you enter a legal agreement with the landlord known as a lease. These leases tend to be long-term – lasting around 90 to 120 years, but also ranging from 40 to as high as 999 years.
Leaseholds can be bought and sold when they have years remaining. When your lease has between 85 to 90 years left, you should start thinking about a lease extension, as generally, the shorter the lease, the less it is worth. The value of short leases can drop rapidly. When the lease falls below 80 years, it will cost more to extend your lease as ‘marriage value’ is included in the formula used to calculate the premium to be paid for the lease extension.
Under the Leasehold Reform, Housing and Urban Development Act 1993, the government has been proactively giving leaseholders protection against short leases, by giving them the right to extend their lease or the right to buy the property. If you want to extend your leasehold, you should follow these steps:
- Speak to your landlord. You can consider approaching the landlord informally to enquire as to the terms on which they would be willing to grant a lease extension. However, you should always seek independent professional advice before agreeing to anything, to ensure you obtain the best possible terms.
- Find a valuation surveyor and a solicitor. Both have expertise and experience essential for leasehold enfranchisement. Solicitors tend to be able to recommend a valuation surveyor, and vice versa.
- Make a formal offer. If you cannot reach an agreement informally, you’ll have to serve a Section 42 notice. This is something your solicitor will be able to help with. Before you exercise your right to acquire a new lease, you should be aware the notice must contain a realistic price for the lease extension.
- Pay the deposit and allow access. If required by the landlord, you might have to pay a deposit of £250, or 10% of the premium set out in the section 42 notice, if that exceeds £250. The landlord also has a right to access your property for valuation purposes following service of the section 42 notice.
- Counter Notice. The landlord must serve a counter notice by the date set out in the section 42 notice (which must be at least two months after the date of the service of the section 42 notice). The counter notice must state whether or not the landlord admits the claim and if so, which proposals are accepted and not accepted.
- Negotiate terms. After service of the counter notice, the parties enter into negotiations in an attempt to agree terms. If terms cannot be agreed, either party has the right to make an application to the First Tier Tribunal for determination.
Subject to meeting the qualifying criteria, you can ask the landlord to extend your lease at any time – but it can be an expensive and complicated process. It is recommended you get professionals – including solicitors and surveyors – involved before you decide to proceed.
If you’re a leaseholder, extending your lease is an investment worth making. But the law is slightly different depending on whether you have a house or flat. You might be able to extend your lease by:
- 90 years on a flat
- 50 years on a house
You have the legal right to do this if you have held the lease on the property for two years, and it was originally a long lease of 21 years or more. You will have to check you qualify for the right to extend. If you’re considering buying a short leasehold property, you should insist the landlord extends the lease before you buy it.
To do this, make it a condition of your purchase that the seller assign the benefit of the Section 42 notice to you. This means as the new owner, you’ll have the right to request a lease extension from the landlord – without having to wait two years to extend in your own right.
Either way, you will have to pay a premium for extending the leasehold – that is why it is important to find a surveyor to do a valuation and help you decide a ‘realistic’ price to pay to extend your lease. Ideally, this is done before you commence negotiations with the landlord. How much you pay depends on a number of factors including:
- The value of the property
- The number of years left on the lease
- The annual ground rent
When extending your lease, here are some things you should bear in mind:
- Formal statutory lease extension processes require the leaseholder, by law, to pay both their own legal and valuation costs, and those of the landlord (although this is also likely to be the case if you agree terms informally).
- A statutory lease extension means you don’t have to pay ground rent – this zero ground rent is known as peppercorn rent. On the other hand, if you extended your lease by negotiating with your landlord, you may have to pay ground rent – depending on what you agree.
- Lease extensions under the Leasehold Reform, Housing and Urban Development Act 1993 set a strict timetable to be adhered to by all parties.
Extending a lease can be complicated and expensive. Gillhams’ property solicitors can make a real difference to the process. We are specialists in leasehold enfranchisement, boasting the necessary knowledge and experience to lead you through all the legal requirements including:
- Determining eligibility
- Guiding you through the complex statutory provisions
- Advising on costs and obligations
- Understanding the two, potentially conflicting, standpoints of landlords and leaseholders
Contact us today for a free initial consultation.