Lease all your troubles away

By Christopher Sykes and Stephan Weber, Sykes Anderson LLP

When you buy a flat, either for your own use or for investment purposes, you will have certain criteria in mind which the flat should fulfil, e.g. location, number of bed rooms, parking space, garden, etc.  But will you also be interested in how many years there are left on the lease or who owns the freehold in the building?  This will rarely be advertised by the estate agents and, even if you are interested, only come to your attention once your solicitor advises you about it. 

While it is understandable that buyers ‘fall’ for a flat because of other reasons than the length of the unexpired term of the lease, it should not be forgotten that the unexpired term will be one of the factors determining the value of the lease.  Unlike the freehold interest, a lease is a depreciating asset and at the end of the term, the property will revert to the freeholder if the lease is not extended.  But help is at hand.  Owners of flats under long leases (i.e. leases for an original term of more than 21 years) have ample rights to improve the value of their property. 

This article will provide an overview of the individual right to extend the term of the lease and the collective right of a group of leaseholders to buy the freehold of their block. 

Lease Extension

Under the Leasehold Reform, Housing and Urban Development Act 1993 qualifying leaseholders (and this includes corporate bodies as well as individuals) have a right to extend the term of their lease by 90 years on top of the original term and to reduce to nil any ground rent that may currently be payable under the existing lease. 

The right is an individual right, i.e. you will not depend on the co-operation of other flat owners in the building, and the right can be exercised repeatedly.  It is generally not possible for the landlord to oppose the lease extension if the qualifying criteria are met.   

To qualify for the right, you must fulfil the following conditions:-

• The lease must be a long lease (a long lease is a lease granted for an original term exceeding 21 years).
• The property must be a flat.
• You must have owned the lease at least for the past two years.  It is possible to bypass this requirement if you are still in the process of buying and the seller has owned the flat for more than two years.  You can then ask the seller to serve the initial notice on the landlord and thereafter assign the benefit of the notice to you.   
• There is only one qualifying leaseholder per flat and that is the leaseholder with the most inferior interest.  This could be the holder of a sublease if you have sublet the flat for a term of more than 21 years.
• The right does not exist vis-à-vis special categories of landlords such as the Crown or ecclesiastical landlords.

To be granted the extended lease, you must pay a premium to the landlord which is calculated according to a statutory formula:

• The longer the unexpired term of the existing lease, the lesser the premium.
• If the unexpired term of the lease is 80 years or less, what is knows as ‘marriage value’ will be payable and increase the price.  Consequently, you should seek a lease extension beforehand whenever possible.
• If the grant of the extended lease lowers the value of other property belonging to the landlord, you will have to pay compensation for this.

In the initial notice to the landlord which starts off the statutory procedure you must state a reasonable price which you offer to pay for the lease extension.  A specialist valuer should be consulted who will be able to advise on the initial sum to be offered and also to provide a best and worst case final figure that you and the landlord are likely to settle on.  As the whole statutory procedure is quite involved and formalistic you should instruct a solicitor to act on your behalf.  In addition to your own legal and surveyor costs, you will also have to cover the legal and valuation costs of the landlord.

An alternative way of extending your lease would be to come to a voluntary agreement with your landlord.  This would also enable you to agree on a longer term, e.g. a 999 year lease.  Yet, if at all the landlord will not be willing to go down this route unless you accept to pay his professional fees as under the statutory procedure.

In any case, before setting out to extend your lease you should consult a valuer to find out what the flat is worth now, how much extending the lease is likely to cost and how much the flat will be worth after the lease extension.  Only then will you be in a position to make an informed decision on whether or not extending the lease will pay off.

Although this is outside the scope of this article we would mention that a similar right exists in relation to leases of houses.  However, subject to certain requirements leaseholders of houses are also entitled to acquire the freehold of their house and this will generally be a more viable right to exercise.

Collective Enfranchisement

Unlike the right to a lease extension this is a collective right and cannot be exercised by one leaseholder alone. 

Typically a company owned by the leaseholders who participate in the enfranchisement will be used to acquire the freehold of the building together with any communal areas (such as gardens and parking spaces) which the leaseholders have a right to use. 

Owning the freehold through a company might not have such an obvious effect on the value of your flat but it will put you in as good a position as possible in a block of flats and only short of owning the freehold outright.  Besides, after exercising the right the participating leaseholders will usually grant themselves new leases for a term of 999 years. 

Leases that come with a share in the freehold company are often advertised as ‘share of freehold’ properties by estate agents.  Owning a share in the freehold company will entitle you to have a say in how the building is run and how service charges are spent which otherwise is often a source of dispute between landlords and flat owners.  Yet, no all management problems can necessarily be solved by exercising the right to enfranchise and you might have to explore other alternatives such as a right to manage claim.

The following are the main criteria that must be satisfied for the right to collective enfranchisement to arise:

• The building or the part of the building to be acquired must be ‘self-contained’.  Unfortunately, what constitutes a self-contained building or part of a building is not always clear cut.
• Two or more flats must be held by qualifying leaseholders and the total number of flats held by those leaseholders must not be less than two thirds of the total number of flats.
• No more than 25% of the internal floor area must be occupied or intended to be occupied for non-residential use.
• At least half of the flats in the building must participate in the collective enfranchisement (with a minimum of two).
• To qualify the leaseholders must hold long leases but there is no need for them to have owned the flat for a certain period of time.

The purchase price payable by the leaseholders is made up of:-

• the open market value of the landlord’s interest in the building
• marriage value (if the unexpired term of the leases is 80 years or less)
• compensation if the value of other property belonging to the landlord is lowered as a result of the collective enfranchisement.

The statutory procedure is even more involved than in respect of the right to lease extension and a complex timetable applies. 

At the outset a valuation should be obtained to ascertain whether the acquisition is justified on a costs benefit analysis.  As with lease extensions the landowner’s right to oppose a collective enfranchisement claim is very limited if the statutory requirements are met and the formalities complied with. 

The first and maybe biggest hurdle to overcome will be to win support of the necessary number of flat owners.  A participation agreement should be signed. 

The participating leaseholders will be liable for the reasonable legal and valuation costs of the freeholder and any other relevant landlord in addition to their own costs.

Both, lease extension and collective enfranchisement can end in complex and complicated proceedings - especially if the right is contested by the landlord - and you should be aware of this at the outset.  If the landlord decides to be difficult and progress is only made slowly it will not be easy to keep up the momentum, particularly in a collective enfranchisement claim where a group of people has to act in concert.  On the other hand, you should not be intimidated by any out-of-proportion sums which are initially put forward by the landlord if you are confident with your own valuation obtained.  In the end, going all the way might well be worth it. 

Please note that this area of the law is a complex subject and you should not take or refrain from taking any step without full legal advice on your particular circumstances. The content of this article is of a general nature and no liability is accepted in connection with it or if any reliance is placed on it.