The term ‘leasehold enfranchisement’ relates to rights enjoyed by certain tenants of residential flats under long leases. For example, the right to extend their lease; collective enfranchisement, and the right to manage, to name just a few.

One benefit available to this class of residential leaseholder is the right to extend the lease of their flat.

A leaseholder would be well advised to start thinking about extending their lease well in advance of the expiry of the lease term, and particularly before the number of years left to run reaches 80 years.  This is because once you drop below 80 years, the premium payable to the freeholder will rise significantly.  This is due to ‘marriage value’.  Broadly speaking, marriage value is the difference between the aggregate of the leasehold and freehold values of a flat before and after extending the lease.

Leaseholders may not know about this right to renew.  However, once they are aware of the opportunity, how do you as a leaseholder begin this process?

There are two potential options when it comes to lease extensions:

1. The voluntary route; and
2. The statutory route, under the Leasehold Reform, Housing and Urban Development Act 1993 ("the Act").

The voluntary route

Under this option, the leaseholder approaches the Landlord and asks them if they will agree to extend the lease and negotiate a price in return.  Under this route, the Landlord is not obliged to grant a new lease. However, if they do agree to extend, the terms of the new lease are very much subject to negotiation; this includes the length of the term and the premium. For example, the Landlord may agree to extend the lease by under 90 years in return for a lower premium, or they may agree to extending the lease for more than 90 years for a higher premium. In addition, the Landlord may also be willing to grant a lease extension to a leaseholder who has not owned the property for 2 years. 

This route can achieve a lease extension relatively quickly. However, not every landlord is attracted to extending their tenant’s lease. 

The statutory route

The Act provides the right for many leaseholders of residential property to extend their lease for a further 90 years.  This 90 years is then added to the unexpired term of the lease.  The Act also provides that ground rent under the statutory route becomes a peppercorn. However, there are two main conditions which need to be satisfied under the statutory route:

1. The leaseholder must have been the registered owner of the property for no less than 2 years, and
2. The lease must be a long lease (i.e. originally granted for a term of 21 or more years).

Being registered as the leasehold owner for 2 years is different from having bought the leasehold property more than 2 years ago.  The current delays experienced with Land Registration exacerbates the problem and can build in a lot longer delays to leaseholders being able to proceed down the statutory route.

If, however, the conditions are met to proceed along the statutory route, a Notice of Claim can be served on the Landlord stating the premium the leaseholder proposes to pay for the extended lease and any variations proposed to the existing lease. Often a surveyor will be instructed by the leaseholder to advise them what premium they should offer to pay. The Landlord then has a period of not less than 2 months to respond to the Notice of Claim by serving a counter-notice.

The parties have 6 months after the date of the landlord's counter-notice for the premium and other terms of the new lease to be agreed. If they have not been agreed within this period, an application to the First Tier Tribunal will be required to determine the disputed terms.

It is common for leaseholders to assign the benefit of a Notice of Claim to a new buyer, so that their buyer does not have to wait the 2 years after registration before they can apply under the statutory route.  It also means that the new buyer becomes liable to pay the premium on the lease extension.

Under the Act, the leaseholder is liable not only for their own legal and surveyor's fees, but also those of the Landlord (and any intermediate landlord).  This can make the statutory route more expensive to the leaseholder than the informal route.

Summary

Any changes on the horizon?

The Government has been trying to implement reforms to leasehold. For example, the method of valuation and the process of lease extension.  However, the above provides an overview of the existing routes available to residential leaseholders who may be looking to extend their lease term or have been asked by their buyer to do so in advance of exchange of contracts.

If you have any queries around the topic of lease extension, please get in touch with our expert property team.