Lease extensions of flats on a sale – what to tell your clients


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When tenants first acquired the right to extend their flat leases under the Leasehold Reform, Housing and Urban Development Act 1993 (Act), there was a perception that this was not as attractive as the other right created by the Act, to collectively acquire the freehold title to the building in which the flats are situated.  However, lease extension claims are generally quicker, simpler and the right is more readily available than the right to collectively enfranchise.

A lease is generally marketable (i.e. a bank will lend against the interest) if it is for 80 years or more. It is not uncommon, particularly in Prime Central London, for flats to be sold on leases of under 80 years.  Accordingly, it is important that the agents are aware that the statutory right to extend the lease exists and how and when that right can be exercised so dealing with the extension can be dealt with at the Heads of Terms stage.

The right

There are some limited exceptions but as a rule, a tenant will have the right to extend the lease if:

  • it is a lease of a flat;
  • the lease was originally granted for 21 years or more; and
  • the tenant has been the registered owner of the lease for at least two years.

It is no longer a requirement that the tenant occupies the flat in order to claim the right, which means companies and investors can also claim lease extensions.

The process

  • Get the notice right – in order to begin a lease extension claim, a formal notice needs to be served under the Act specifying the terms on which the tenant is entitled to a new lease. The notice should be served by a specialist as there are various technical requirements for a valid notice.
  • Know your property – a notice needs to be served on the existing freeholder and intermediate landlords as well as any third party to the lease, if they are still involved in the management of the property. The buyer’s agent can considerably assist in the process by ensuring the buyer provides the seller with all the information needed to prepare the notice and launch the claim. This will include the title documents, the lease and details of any other third party involved with the building, such as a management company.
  • Know your value – there is a mechanism in the Act for calculating the premium payable for the lease extension (albeit there is always a margin of difference between valuers) and the premium proposed by the tenant must be included in the notice. It is important that the tenant obtain a specialist valuation as quoting the wrong premium could make the notice invalid.
  • Agreeing terms – the landlord then serves a counter notice proposing its premium. If the parties cannot agree this and the other terms of the renewal lease by negotiation, it will be determined by the First Tier Tribunal.

Buyers beware

  • A buyer who buys a lease will have to wait two years from the date he is registered as the owner until he can begin a claim for a lease extension. In the case of a lease of less than 80 years, during this two year period the premium payable will almost certainly increase.
  • The way to avoid this is for the seller to begin the claim and for the claim to be assigned to the buyer on the assignment of the lease. It is vital that the notice is served before the flat is sold and the assignment of the notice must take place at the same time as the flat is sold.
  • If the agents can agree all of this at the Heads of Terms stage then the solicitors can prepare the notice and the necessary provisions in the contract.

Managing the lease extension post-sale

  • Once served, a notice must be registered on the landlord’s title. If not, a purchaser for value will take free of the lease extension claim.
  • In addition, there are various deadlines with which the parties need to comply, failing which the tenant will have been deemed to have withdrawn its claim.
  • A specialist solicitor will be familiar with these issues and will be able to manage this process.

For further information, please contact:

Amanda Hado-Bodfield, Partner, Fladgate LLP (ahado-bodfield@fladgate.com)

 

 

 

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