The statutory right is a 90 year extension with the ground rent reducing tona peppercorn. To reduce the premium one can offer a higher ground rent and ask for a shorter extended term.
Extending your lease has been a legal right to qualifying leaseholders since 1993. Leases will continue to get shorter and in some areas of London leases of 40-60 years are common place.
Increasingly legislation has been changing to benefit the leaseholder. For example qualification criteria have been relaxed and it is no longer necessary to live in the flat for 3 years or qualifying periods amounting to 3 years. You will need to own the lease for 2 years to qualify but do not need to live in the flat and can own it through a company. BUT, if you want to sell up, you can sell on your rights under Section 43 of the 1993 Act so the new purchaser does not have to wait 2 years to qualify.
Exercising the right requires a formal legal notice to be served on the Freeholder and all intermediate landlords.
Your statutory right is to an additional 90 years with ground rent reduced to a peppercorn.
Here the Leasehold Guidance Service provides a step-by-step guide to Extending Your Lease.
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What's in a lease extension valuation?
To get your head around this you need to understand that whilst your lease is valuable to you today, at whatever you could sell it at in the market place, your lease is also valuable to the Freeholder who
- receives investment income from it (the ground rent)
- has the hope value of a premium from you (for buying a lease extension) and
- holds the reversionary interest (the value of a vacant flat in XX years time)
This is a specialist area of valuation that needs some understanding as the valuation methodology involves the following elements:
- Market value of the flat
- a short lease with ground rents payable as covenanted under the lease
- a long lease with peppercorn ground rent payable (existing term + 90 years)
- the value of the landlord's interest
- ground rent receivable as covenanted under the lease
- present value of the reversionary title (a vacant flat with long lease) once your lease has expired
- Marriage value ie, the difference between 1(a) and 1(b)
for flats with less than 80 years unexpired on the basis of
Understanding valuation science
The science of valuation enables us to calculate the "present value" of the future right to your vacant flat and enables us to value the ground rent (an income stream for a term of years.
The valuer will consider market evidence and settled caselaw to select the appropriate capitalization rate upon which to base our valuation of the ground rent. In simple terms this could be a rate derived from or comparables such as gilts yields (gilts are government bonds), interest rates paid on bank credit balances, the bank base rate + a premium for the perceived risk of investing in property etc.
He/she will select the appropriate deferment rate by which it is reflected that the reversionary value to the landlord is some years away.
There are arguments that the capitalization rate for ground rent payable to an intermediate landlord should be capitalized at a different rate to ground rent payable to a Freeholder. We can talk you through such arguments, but essentially it all relates to the perceived quality of each as a provider of investment income.
The valuers will draw from market evidence and settled caselaw the improvement rate which is the percentage by which the value of the flat would increase from being granted a statutory 90 year lease extension. This is subjective and probably the most argued point at First Tier Tribunal. Negotiation factors will be the length of the lease unexpired lease as opposed to the length of a typical lease in the area. For example, in Knightsbridge where short leases are common place it could be argued that the improvement rate would be less than where short leases are uncommon.
Remember, since July 2003, the improvement rate is 0% if your lease has more than 80 years unexpired! This means you compensate the Freeholder for the loss of ground rent but do not have to pay marriage value.
What we need to do a valuation
- A copy of your lease as this will set out the ground rents covenanted during the term.
- To inspect the flat and understand the context of the building in which it is situated.
The Leasehold Guidance Service is part of the Ringley Chartered Surveyors therefore a Chartered Surveyor will carry out the valuation for you.
Our valuation report includes a full commentary on
- comparable evidence to support our opinions
- analysis of how we select the investment yield
- recent court decisions re: marriage value (the difference in value between a short lease and a virtual freehold)
- advice on what you should serve as the price on your initial notice
Cases where there is an intermediate landlord
Where due to an intermediate interest such as a headlease we have to consider additional valuation factors under paragraph 8(1) of Schedule 13, or paragraph 8(3) such as where an intermediate interest receives a profit in ground rent or has a reversionary interest of more than 5 days it may be required to be valued as a wasting asset which would according to case law require a sinking fund and tax to be allowed for. Valuing an intermediate interest adds an additional £150 to our standard fee structures.
Our fees reflect the amount of research necessary to fulfill the valuation methodology set down in law and to enable us to provide you with not only a valuation but elemental reasoning behind each part. From all this we are able to piece together the eventual "valuation" "premium that should be paid".
Should I serve a Notice or open informal discussions?
A difficult question!
Some Freeholders will quite rightly refuse to entertain discussions without a formal notice. From the Freeholders perspective, without formal notice he/she is at risk for fees to cover professional advice they need to negotiate with you.
That being said, if your freeholder lives in the block it would be better to have a chat first. Strangely some freeholders still need educating that it is a leaseholders right to claim a statutory lease extension.
The Notice that you have to serve on the Freeholder and all intermediate landlords invokes statutory timescales for response. Errors in a notice may result in the lease extension being completed at the price stated by the party whose notice is not legally flawed.
The information a Lessee need to state on their notice includes:
- Details of your lease
- The premium you would like to pay for the lease extension
Understanding what "premium" you should quote on your notice requires specialist valuation advice. There are rather more factors in a lease extension valuation than perhaps a typical mortgage valuation as set out above, also there is the element of assessing compensation due to the landlord and intermediate interests for postponing their valuable reversion by a further 90 years. The leaseholder claiming his/her rights is the party that in law is responsible for both parties costs and it is our understanding that if the residents have served Notice then the Landlord's surveyors fees form part of the purchase price together with reasonable legal fees.
Negotiations & FTT
Fees are well spent if a valuer with appropriate expertise has been selected. There are many unqualified surveyors dabbling in this type of work and you should always understand the age, experience, qualifications and competency offered by the firm you select.
Advice on negotiations
Whilst our valuations do include evidence, a valuation commentary, advice on what to serve on your initial notice/counter notice, should you not be able to close the deal we can negotiate valuation differences on your behalf.
Negotiation are carried out by a Director or FRICS qualified Surveyor and are chargeable on an hourly rate. We would usually give you a time/cost initial budget based on the complexities perceived in the case in question. We would account our time to you if negotiations are not concluded within this initial budget.
Advice on going to a First Tier Tribunal
If negotiations fail to be fruitful then we can lodge an application to the First Tier Tribunal for a determination. Lodging an application costs in the region of £350. You will also be responsible for the costs of representation at the hearing this will be based on an hourly rate for a Director or FRICS qualified Surveyor.
Understanding Tribunal procedure
After lodging your application your case will be allocated a case reference number and listed for a pre-trial review. At pre-trial review the tribunal will make directions on what evidence they want to hear and set timescales against which the case is to be conducted.
Our attendance at the pre-trial review is not essential but often this is a good time when face to face negotiations can take place with the other side to agree any facts that can be agreed and agree what cannot be agreed between the parties. This assists all concerned in which areas to focus the evidential part of the hearing day on. For example, it could be that yields become agreed but that the value of the flat is what is referred to the First Tier Tribunal for determination.
The cost of presenting a case at First Tier Tribunal depends on the number of days the case is listed for and what can be agreed between valuers in the period running up to the case.
As a leaseholder you could represent yourself should you choose to do so. As a Leaseholder you are at risk for your professional costs, the application costs and the Freeholder costs. As a Freeholder professional advice flowing from a valid Notice claiming a lease extension is to be compensated to you as part of the Lease Extension rights.
Complete Legal Work
This is a specialist area of law that many high street solicitors do not practice in.
If the timescales required for the various stages are not adhered to or the specified matters within the Act not disclosed then this can be to the detriment of one or other party.
The legal work necessary to complete a lease extension includes
- Obtaining a copy of the lease
- Obtaining a copy of the Land Registry Title Number
- Checking your eligibility to qualify as a leaseholder who can exercise their statutory rights
- Serving information notices to trace the Freeholder/Competent Landlord
- Serving Notices to claim your statutory right to a 90 year lease extension:
- On the Freeholder/Competent landlord
- Via a Vesting Order where the landlord cannot be found
- Via the Trustee in Bankruptcy where landlord is an individual who is bankrupt
- Via the Receiver where landlord is a company in receivership
- Dealing with Landlord's requests for a deposit to be paid. By law this can be 10% of the premium or #250 whichever is the greater
- Executing a Deed of Variation to vary the term (length of the lease) to take into account the additional 90 years
- Advising on or considering other terms that variation would have benefit to one or both parties
- Handling Client monies and paying the premium to the landlord
- Registering the Deed of Variation with the Land Registry
- Obtaining a Mortgagees (your mortgage company's consent) to such registration of a Deed of Variation
- Witnessing any deeds or discharge forms required by your mortgage company to enable registration that your lease has been extended with the Land Registry
- Lodging a case with the First Tier Tribunal where terms cannot be agreed.
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