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A Guide to Extending Your Lease

Introduction

This guide is divided into 2 sections: the Procedure and the Valuation.

The Procedure

1. GENERAL
There have been several amendments since the Leasehold Reform, Housing and Urban Development Act 1993 which set out the modern rights for tenants to claim an extended lease. Below is a brief summary of the points.

1.1 Qualifying
Broadly, if the term at the start of the lease was for more than 21 years, the lease is a qualifying lease. If a tenant has owned a property for more than 2 years, they qualify to claim the lease extension. There is now no need for a tenant to have lived in a property as their only or main residence, as this test has been abolished.

1.2. Entitlement
The Act confers on a qualifying tenant the right to claim an extension of 90 years in addition to the term remaining on the present lease, at nil rent. The other principal terms of the lease, such as the service charge, the obligation to repair, the use etc, are to remain unchanged, other than minor modifications where appropriate.

2. PROCEDURE

2.1. Making the Claim
In order to obtain the lease extension, the tenant must give the landlord (and any intermediate head lessee) a formal notice of claim, which is normally prepared by a solicitor. The notice must state the amount the tenant is prepared to pay for the lease extension, apportioned as necessary between the main landlord and any intermediate landlord. The amount stated must be a realistic price so as not to invalidate the claim. There is no hard and fast rule about what is a realistic price, but it is acceptable to reduce the amount by a small margin to allow the parties some room for negotiation. Finally, it should be noted that the landlord is entitled to require the tenant to pay a deposit equal to 10% of the price stated in the notice.

2.1. Landlord's Response
The landlord must respond with a formal counter-notice within two months, also stating the amount it is prepared to accept for the lease extension. If the counter-notice is not given in time, the tenant is entitled to the new lease on the terms set out in their notice.

2.2. Negotiation
Once the notice and counter-notice have been served, the parties will normally negotiate to agree the price for the new lease. If the price cannot be agreed amicably, the dispute is referred to an independent body, the First-tier Tribunal ("FTT").

3. TIMESCALES
We are often asked how long the whole process takes but it is difficult to predict until it is known how far apart the parties are in their valuations. In our experience, the average time taken is about 9-12 months, but the Act sets out time limits for various phases in the process, and they are:

3.1. Counter-notice
The tenant cannot require the landlord to give the counter-notice in less than 2 months. In our experience, landlords normally use the whole of this period to respond.

3.2. Application to the FTT
If the price cannot be agreed amicably, the earliest either party can apply to the FTT is 2 months from the date of the counter-notice. While either party is allowed to make an application, there is a further rule that if the tenant does not make an application within 6 months of the date of the counter-notice (assuming no earlier application has been made by the landlord), the claim is deemed withdrawn by the tenant. This is a trap that tenants fall into all too often, and great care should be taken not to miss this deadline.

3.3 Decision of the FTT
Generally it takes about 4 months for a hearing to be held, and a further 1-2 months before the decision is published, after which either party has a further 3 weeks to apply for permission to appeal to the Upper Tribunal.

3.4 Completion of the New Lease
Once the parties have agreed the terms of the new lease, or the deadline to appeal the FTT's decision has expired, the parties have 2 further months in which to complete the new lease. If completion has not taken place by then, the tenant must make a court application to protect its right to the new lease at the price agreed or determined by the FTT.

4. THE FIRST-TIER TRIBUNAL
If the parties cannot reach agreement amicably on price or the terms of the new lease, the matter can be determined by the FTT.

4.1 General
The FTT is best described as a less formal version of a court, headed by a lawyer, a valuer and sometimes a lay person as well. The tribunal issue directions in advance with a strict timetable for the submission of evidence 2-3 weeks prior to the hearing date and if the hearing proceeds they listen to the evidence and cross-examination presented by expert witnesses. After a period of deliberation, the tribunal then issues its decision. The decision is binding on the parties, subject to a limited right for either party to appeal.

4.2 Costs
Costs can frequently run to many thousands of pounds, and the FTT now has the jurisdiction to award costs, but usually only if there has been an abuse of procedure. Generally costs cannot be recovered, regardless of who 'wins' the case. Therefore, it is vital that the decision to take a case to the FTT is completely unemotional, nor should it be taken on a pure point of principle unless there is a genuine commercial rationale for doing so.

4.3 Impartiality
Being a quasi-court, all expert witnesses must conduct themselves in accordance with the Civil Procedure Rules. The valuer must be truthful, unbiased and open-minded, and he cannot withhold any evidence that could prejudice your case.

The Valuation

5. INTRODUCTION

The price to be paid for the lease extension is not the market value of the flat, either on the present lease or the long lease. Instead it is made up of 3 component parts:

(i) The diminution in the investment value of the property to the landlord arising from the grant of the new lease,
(ii) A half share of the marriage value released by the grant of the new lease, and
(iii) Compensation for any loss or diminution in the value of any other property that is directly attributable to the grant of the new lease

The price for the lease extension will always contain (i), frequently (ii), and occasionally (iii), depending on the circumstances of the individual case. Each element will need to be ascertained separately for the landlord and any intermediate landlord.

5.1 The Valuation Date
The date on which the tenant's notice is served (i.e. when it is received by the landlord) is known as the valuation date and it is a fixed snapshot in time.

6. DIMINUTION IN THE INVESTMENT VALUE OF THE PROPERTY

6.1. This comprises the loss to the landlord for being denied the ground rent payable through the present term and the additional delay (by a further 90 years) of the landlord's reversion, when he would expect the property to be handed back.

6.2. The investment value will therefore be dependent upon the lease terms (and the rent review provisions in particular), the yield rate applied to value the term, the long leasehold value of the flat with vacant possession, and the deferment rate. The deferment rate is the discount rate for assessing the future reversionary investment value to the landlord should he sell it today.

6.3. There are various assumptions to be considered about the flat; firstly, it is assumed to be in good repair but unmodernised (in accordance with the lease), and secondly, any improvements carried out by the tenant (or his predecessor) may be disregarded. Generally, improvements have to be tangible additions, such as extra bathrooms, where one had not existed before, so the replacement of a kitchen or bathroom may not qualify.

6.4. Once the long leasehold value of the property has been established, the figure is discounted in direct proportion to the number of years before the landlord regains possession. Case law has now established a generic deferment rate of 5% for flats where the lease has between 20-71 years unexpired at the date of claim. Only in very exceptional circumstances can this be challenged.

7. MARRIAGE VALUE

7.1 The Concept
The simplest way to explain the concept of marriage value is to say that the sum of the values of the landlord and tenant parts do not equal the value of the whole, and the difference between these two figures is known as the marriage value. It is often misquoted as the difference between the value of the existing lease and the freehold with vacant possession, but this takes no account of the landlord's existing interest and is wrong.

7.2 The extra value that is released by the grant of the lease is the marriage value, and the Act provides for it to be shared equally by the landlord and the tenant. However, if the existing lease has more than 80 years left to run at the valuation date, then no marriage value is payable. It is therefore critical to apply for a lease extension before the lease drops below such a point (if possible). It should be noted that the Act requires us to value the property as if the tenant had no rights to extend the lease, often misquoted as the "no Act world". Clearly, if the existing lease had no prospects to extend then it would have a lower value compared with a property that could extend. Therefore this "hope" needs to be stripped out of the existing leasehold value, but the amount varies depending on the length of the lease.

7.3 As there is little market evidence of non-enfranchiseable leases, valuers often refer to previous settlements of claims that have taken place over the years, and from which several graphs of relativity have been produced. There remains a degree of uncertainty surrounding this part of the valuation, and settling the value of the lease will be largely down to negotiation.

7.4 Obviously, besides the length of the lease, there are other factors in the lease that affect relativity. Predominantly these are the rent, repairs/service charge, permission to alter the flat or not, the restrictions on assignment/underletting, and the user clause. Clearly, the lower the relativity, the greater the marriage value and the more expensive the lease extension.

8. COMPENSATION FOR ANY OTHER LOSS
The landlord is entitled to recover any other losses that he may incur as a consequence of the extended lease, e.g. if it affects other interests that the landlord owns in the same building. This is rare occurrence, and the landlord will have to demonstrate a very compelling case to succeed in such an action.

Disclaimer

This document is intended for general guidance only, it does not cover all aspects of enfranchisement, and therefore no liability for its contents is accepted. Please contact this firm if you wish to discuss a specific case.

We invite you to try our Online Calculator, but please be aware that it may not be an accurate reflection of the likely premium as this simple model will not cover any unusual circumstances or lease provisions. We therefore accept no liability for anyone relying upon its information, and instead urge you to contact us for a full appraisal.

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