Julie West Solicitors property team: Len Boreland, Celia Perry, Martin Whitehorn and Julie West
When you own a leasehold property, potential buyers will struggle to get a mortgage for your property when the term of your lease starts to fall below 80 years. Some lenders require a minimum unexpired lease term of 85 years remaining at the end of the mortgage term or even 250 years for new build houses.
‘Marriage value’ also comes into play when the unexpired term falls below 80 years, increasing the premium paid to the landlord when you come to extend.
It is therefore no surprise that many leaseholders extend their lease before they sell their properties to make them more attractive to buyers.
Two roads diverged in a yellow wood… but which one to take?
While leaseholders tend to be familiar with the formal, statutory route of lease extension - the legal right to extend your lease normally after you have owned the property for at least two years - it is also possible to extend your lease via the informal, ‘voluntary’ route.
With a voluntary lease extension, you and your landlord agree the terms of the lease extension independently of the process prescribed by law.
The differences?
Statutory lease extensions have to follow a strict process imposed by law.
Provided you have owned the property for 2 years, in general, your landlord cannot refuse to use this route if you serve the leaseholder’s initial notice of claim to a lease extension, known as a Section 42 Notice.
There are exceptions to this, for example, the owners of shared ownership leasehold properties are not entitled to use the statutory route unless they own 100% of their property.
Both landlord and leaseholder are legally bound to proceed with the lease extension following receipt of the Section 42 Notice. With voluntary lease extensions, on the other hand, there is no prescribed process and therefore no requirement that the leaseholder must have owned the property for a minimum period.
However, your landlord is also not obliged to extend your lease and indeed can refuse to do so, unlike the statutory route. No one is legally bound to proceed in a voluntary lease extension and either party can withdraw from the procedure prior to completion, which would lead to wasted costs.
The new terms of the lease
Statutory lease extensions can seem restrictive as the lease term can only be increased by 90 years on top of the present unexpired term and the ground rent must be reduced to a peppercorn (i.e. £0). The ground rent the landlord will lose over the remaining unexpired term will be reflected in the final price agreed for the lease extension. Then again, when it comes to voluntary lease extensions the landlord is free to dictate its own terms, like increasing the ground rent, and does not have to be reasonable in those terms, which can make the statutory process seem attractive in comparison.
The statutory deposit
Once the Section 42 Notice has been served, the landlord often requires the leaseholder to pay a deposit of 10% of the tenant’s proposed price for the lease extension, specified in the Section 42 Notice. The leaseholder then has 14 days to pay that deposit. There is no such obligation for a deposit to be paid when extending your lease voluntarily.
Keeping the process moving - Best of both worlds
The statutory route imposes a strict timetable on when the leaseholder’s notices and the landlord’s counter notices can be served.
If the terms of the lease extension or the premium to be paid are still in dispute two months from the service of the landlord’s counter notice, an application can be made to the Property Chamber of the First-Tier Tribunal to decide on the terms that cannot be agreed.
Landlord’s sometimes pressure the leaseholder into avoiding wasted costs by asking for an increase in the premium to be paid during the voluntary process. The statutory procedure prevents this.
However, did you know most lease extensions are settled through voluntary negotiation, whichever route you take? In other words, even if you serve the initial Section 42 Notice, it is still possible to agree terms with your landlord after getting valuation advice without resorting to the First-Tier Tribunal, as would otherwise happen with a statutory lease extension.
The statutory timetable is useful when dealing with a landlord who may otherwise let the process become protracted.
Why wait?
In both cases, the shorter the unexpired lease, the higher the premium is likely to be.
Julie West Solicitors has the experience and expertise to guide leaseholders and landlords through the lease extension process. Call us on 01372 383273 or email hello@juliewestsolicitors.co.uk for a no-obligation chat.