Are You Thinking of Extending the Terms of Your Residential Lease?

Posted by the Property team on 18th August 2021

Most flat leases are granted for an initial term of 99 or 125 years.  If the lease isn’t renewed at the end of the term, the flat becomes the Landlord’s property again.

This means that as the years pass by, the flat becomes less valuable.  Mortgage lenders do not like to lend on short leases and so flats that have short leases become harder to sell and/or re-mortgage.

The Landlord is entitled to a premium for agreeing to extend a lease.  The premium payable is likely to be less if the lease term is extended before it drops below 80 years.

There are two ways of extending your lease:

1. The Leasehold Reform, Housing and Urban Development Act 1993 (‘the Act’) gives some flat tenants the right to extend their leases.

Leases granted pursuant to the Act:-

• Add 90 years to what is left of the term to run (i.e. if a lease had 50 years left to run and was extended under the Act the term once the lease was extended would be 140 years); and
• reduce the annual rent payable to the Landlord to a peppercorn (i.e. nothing).

2. A Tenant can also approach their Landlord at any time, to see if they would be willing to extend the lease by way of negotiation instead. The terms of a negotiated lease extension are variable and the Landlord does not have to agree to reduce the rent to a peppercorn, nor agree to add an extra 90 years to the term.  However, if your lease doesn’t meet the requirements for a lease extension under the Act, but you want to extend your lease, then exploring a negotiated lease extension may be for you.

Before I start, what costs am I likely to incur?

• The premium payable to your Landlord for granting you the lease extension.
• When you serve notice on the Landlord requesting a lease extension, the Landlord can request a payment of 10% of the premium stated in your notice requesting the lease extension, or a sum of £250 (whichever is the greater). This is payable within 14 days of request.  The remainder will be payable when the lease extension completes.
• If lender consent to the lease extension is required, they may charge you administration fees for dealing with this.
• All outstanding Ground Rent and Service Charge payments must be paid up to date.
• Your legal fees and your surveyor’s fees.
• Your landlord’s legal fees and surveyor’s fees.
• If terms can’t be agreed and the matter is referred to the First Tier Property Tribunal, or if an application to the County Court is required, then the costs associated with this will be payable. These include Court Fees and Barrister Fees.  These costs will vary.
• Stamp Duty Land Tax may be payable.
• The new lease will need to be registered at the Land Registry and the fees will vary depending on the final premium agreed for the lease

What are the requirements for a lease to be extended under the Act?

• The Tenant must have a lease of a residential property which was originally granted for a term of over 21 years.
• The Tenant must have been the registered owner of the property at the Land Registry for a period of over 2 years.  With Land Registry delays, this date may be sometime later than the date when the transfer of the flat to you was completed.

If I qualify for a lease extension under the Act what now?

• You will need to instruct a specialist surveyor to advise you on what the likely premium payable to your Landlord to extend your lease will be.
• Instruct a specialist solicitor to:
  • Ensure that you are able to obtain a lease extension under the Act.
  • Identify the correct Landlord who is capable of granting a lease extension. Sometimes, if there are lots of leasehold interests, your immediate Landlord may not be the person who can grant you the lease extension.
  • Review your existing lease and see if any of the existing terms should be varied to modernise the lease, or rectify any defects.
  • Draft and serve the notice on the Landlord (and any other relevant third parties) that you wish to obtain a lease extension under the Act (“the initial notice”).
  • Liaise with your surveyor about the premium payable for the lease extension which needs to be set out in the initial notice.
  • Arrange for details of the initial notice to be registered against the Landlord’s Land Registry title to ensure that it binds any future purchasers.
  • Negotiate with the Landlord’s solicitor about the terms of the draft Lease extension and completing the document.
  • Liaise with your lender (if any) for what is known as a Deed of Substituted Security. This document confirms that the lease extension remains subject to the existing mortgage.
  • If there is a mortgage on the Landlord’s title, then ask their solicitor to seek their lender’s consent.
  • Ensure that the time limits under the Act for a Lease Extension are met.

The Timetable

1. Once the initial notice has been served, the Landlord has 2 months to serve a counter-notice.  If the Landlord doesn’t serve a counter-notice within this two-month period, then the Tenant can apply to the County Court for a new lease on the terms set out in their initial notice.
2. If the Landlord agrees to the proposals of the Tenant as set out in the initial notice, or negotiations between the parties resolve any dispute, then a draft lease extension should be prepared by the Landlord and served on the Tenant within 14 days after the date of the agreement.
3. Within 14 days of receipt of the draft lease extension, the Tenant’s solicitor should make any amendments to the draft lease extension and return it to the Landlord.
4. The Landlord then has a further 14 days within which to make further amendments or circulate copies of the lease extension for signing.
5. Either party can serve a completion notice once the lease is approved. Completion will take place after the expiration of 21 days after the date of service of the completion notice.
6. If the parties can’t agree to terms within 2 months from the date of the Landlord’s counter-notice mentioned, then either party may apply to the First-Tier Property Tribunal (FTT) for determination. An application to the FTT must be made no later than the end of the period of six months from the date of service of the Landlord’s counter-notice. If no application is submitted to the FTT within this time period the claim to the new lease is deemed as withdrawn.

Bennett Griffin LLP has a team of specialist lawyers who can assist you with every step of your lease extension.  If you want to extend your lease, please get in touch today by calling 01903 229999 or by emailing info@bennett-griffin.co.uk

Disclaimer: Please note that this update is not intended to be exhaustive or be a substitute for legal advice. The application of the law in this area will often depend upon the specific facts and you are advised to seek specific advice on any given scenario.