The Prime Minister addressed the nation on Sunday 10 May with an update regarding “lockdown” and the slight easing of restrictive measures in place across the country. Over the last few days this has materialised into the government encouraging workers to return to work, if they cannot work from home and if safe to do so, and the unlocking of the housing market in an attempt to get the economy up and running. (See our latest article about this here)
The fallout from COVID-19 is still to be assessed and it is important now, more than ever, to plan ahead and ensure that our financial positions are such that we are best placed to weather any storm that may lie ahead.
One asset you may want to consider protecting is leasehold property. This is especially true if the term remaining on your existing lease falls below the crucial 80 years mark, following which “marriage value” will become a factor for the calculation of the price payable to your landlord for the lease extension, known as the premium.
A shorter lease not only can lead to a quickly escalating premium payable for a lease extension each further year that passes by, but also may deter a prospective buyer who could find it difficult to obtain lending from a usual high street lender.
Given the uncertainty caused by the ongoing COVID-19 pandemic on the property market and valuations, extending your lease now could help to protect and reinforce the value of your flat, as the calculation for the premium is based, in part, on current property valuations.
Now, as a leaseholder, may be the opportune moment to capitalise and in the first instance take advice from a specialist lease extension surveyor, as referred to below.
How do I Extend my Lease? Which Route is Right for me?
There are two ways you, as a leaseholder can request a lease extension from your landlord and each have their respective advantages and drawbacks.
- Statutory Route
The first method is via the statutory route under the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993), hereafter referred to as “the Act”. There are certain qualifying criteria to be eligible to utilise this route, which includes the requirement of having owned your flat for at least two years and that your lease is considered to be a “long lease” (in excess of 21 years when first granted).
The statutory route is commenced by the service of a formal notice (known as a Section 42 Notice) on your landlord, following which there are strict time limits and procedures that both you and you landlord must comply with. If no agreement can ultimately be reached on the terms of the new lease or the premium to be paid, then an application to the Tribunal will become necessary for this to be determined.
The statutory starting point for the new lease under the Act will be:
- A new yearly ground rent of a peppercorn (effectively nil);
- An additional 90 years to the remaining term of your existing lease; and
- The new lease will be on the same terms as your existing lease, save for any necessary modification required by the changes in the law.
As mentioned above, you will also be required to pay a premium to your landlord and it is vitally important that you seek a valuation from a surveyor specialising in lease extensions before the serving of the formal notice on your landlord. The notice must outline your offer for the premium, and the surveyor, following the undertaking of the valuation, will be able to provide a guide (best and worst figure) for the premium figure to be included. It is important to avoid the scenario where your premium offer could be considered to be unrealistically low, prompting your landlord to seek to challenge the validity of your notice as a result.
The valuation date for the lease extension is fixed on the date that the formal notice is served on your landlord and therefore it may be beneficial to fix this date soon, before any possible resurgence in the market.
Under the statutory route, you will be responsible for the landlord’s reasonable legal and valuation costs from the point at which the formal notice is served; save for your landlord’s costs associated with negotiation of terms following the service of the landlord’s counter-notice or proceedings at the Tribunal.
Your landlord is also entitled to ask you to pay a deposit of 10% of the premium stated in your formal notice or £250.00; whichever is the greater. You should therefore look to budget for this too.
- Voluntary Route
If you are not eligible to use the statutory route or do not wish to proceed under the Act (as you may want different terms), then the alternative method to extend your lease would be to approach your landlord in the first instance to ascertain whether they would be willing to negotiate a lease extension voluntarily.
The process of this voluntary route will depend on your landlord as they are not obligated to agree to your request for a lease extension, unlike under the Act. In circumstances where you have a good relationship with your landlord who would be willing to negotiate, the process may be quick, simple and considerably cheaper than the statutory route under the Act.
Unlike the statutory route, where the terms of the new lease are fixed (a peppercorn yearly ground rent and an additional 90 years), the new terms of the lease can be more flexible as there are no limitations of what can be included.
For example, you may be able to negotiate a longer term, such as an additional 125 years or 999 years, and the strict timetable under the Act does not apply.
However, this comes at the cost of certainty as your landlord at any point may refuse to negotiate or seek to impose terms that are considered to be unreasonable. You will not be able rely on the Act or the Tribunal to resolve a dispute without reverting to proceed via the statutory route.
It is equally important under the voluntary route to seek a valuation for the premium from a specialist lease extension surveyor to reassure yourself as to a reasonable figure. Your landlord may ask that you undertake to be responsible for their legal and valuation expenses from the outset under the voluntary route, and therefore it would be sensible to receive this valuation advice in advance of committing yourself.
Our Residential Property Team here at Leathes Prior would be happy to discuss whether the statutory or voluntary route best suits your needs and our contact details are located at the foot of this article.
Can Valuations Still go Ahead During Lockdown?
The short answer is ‘yes’.
Whether you intend to proceed using the statutory or voluntary route, it is advisable to first obtain a valuation report from a lease extension specialist surveyor.
This valuation report can be prepared by the surveyor following either a physical inspection of your flat or from a desktop enquiry.
The ability to carry out desktop valuations has been unaffected by lockdown. This usually consists of the surveyor considering your existing lease and floor plan, assuming that the condition of your flat is no better or worse than that required by your lease, and obtaining further valuation data online.
Following recent legislation which came into effect on 13th May 2020, aiming to unlock the housing market, physical inspections by surveyors are now also permitted. Your surveyor will be encouraged to follow the government’s ‘social distancing’ and ‘working in other people’s homes’ guidelines to safely visit your flat for the purposes of preparing the valuation.
A physical inspection is the advisable option, provided this can be carried out safely and you are not in self-isolation.
A Simultaneous Remortgage?
If your flat is subject to a mortgage, now may also be a good time to speak with an independent financial advisor to see whether you can take advantage of the historic low Bank of England base rate of 0.1%.
It is often an opportune time, when extending your lease, to also review your existing mortgage deal and compare this to other products on the market, especially if your fixed term interest rate has or shortly is about to expire.
Again, our Residential Property Team are here and ready to help with the legal aspects of re-mortgaging.
We would be happy to discuss with you any initial queries that you may have on the processes above or to provide an estimate of our fees to assist your lease extension. Please feel free to contact us by email or by phone 01603 610911.