Lease extensions 

What is a lease extension?

Flat owners are entitled to bring a claim against their landlord to extend their lease for 90 years  (on top of the unexpired term of the existing lease) in exchange for paying a premium.

The premium is an amount to be agreed between the landlord and tenant based upon various factors including the number of years left on the existing lease, the market value of the flat and the ground rent payable (which will reduce to a peppercorn (i.e. nil) when the lease is extended).  If the landlord and tenant cannot agree on the amount payable, either party can apply to the First Tier Tribunal to determine the amount payable.

Why extend your lease?

The longer the term of a lease, the more valuable a flat is. Therefore a lease extension is an investment.

Conversely, the longer a tenant leaves their lease to run down, the higher the premium they will pay as and when they do come to extend it.

The premium payable for extending a lease becomes substantially higher when it has less than eighty years left to run. Further high street banks will generally not offer mortgages on leases where the remaining term is less than eighty years. Therefore if a tenant's lease is close to having eighty years left to run, they should urgently look into extending it.

Concerns for tenants on lease extension claim

There are many pitfalls in the lease extension process, as there are various deadlines that cannot be missed and there are intricacies to the notices that need to be served. If these are missed then it can have a big financial impact.  It is therefore imperative that a specialist solicitor is instructed to assist with the process.  Also, the formula for calculating the premium payable is complicated, and tenants should consider instructing a specialist valuer.

As well as being responsible for their own costs, tenants are also responsible for the landlord's reasonable costs so this cost should be factored in before the tenant brings a lease extension claim.  If the premium payable is sufficiently high then SDLT will be payable by the tenant on the premium. If the matter is referred to the Tribunal then the costs in dealing with this can be high, as the tenant may wish to instruct specialists in the area to represent them.

Collective enfranchisement

What is collective enfranchisement?

Collective enfranchisement is when the majority (not necessarily all) of flat owners join together to buy the freehold of their building from their landlord for a premium. The tenants will put in place a company to purchase the freehold and will take a share each in this company (commonly known as having a share of the freehold).

Advantages of collective enfranchisement

Owning a share of the freehold is generally seen as being valuable when it comes to selling a flat. Further, if tenants own the freehold, they are able to grant themselves long leases of their flats meaning that they avoid the time and expense of a lease extension claim.

Collective enfranchisement is particularly helpful if you are unhappy with the performance of your landlord, for example if they have allowed the exterior or common parts of the building to fall into disrepair, or they undertake expensive works that are then charged to the tenants.  By purchasing the freehold of the building, tenants are taking control of the building.

Pitfalls of collective enfranchisement

The legislation surrounding collective enfranchisement is very complex. There are various tests that need to be satisfied before tenants can bring a claim and tenants should therefore seek specialist legal and valuation advice.

In order to bring a collective enfranchisement claim, a tenant must work closely with their neighbours, both during the claim and afterwards.  It is recommended that all participating tenants enter into a participation agreement, which will set out the various obligations of each tenant.

Tenants also have to decide whether they are willing to take on the burden of maintaining the building once they have purchased it, for example arranging for insurance or dealing with any repairs or decorations. If tenants are satisfied with the job that their landlord is doing in this respect then it may not be worth taking on this additional work.

This article originally appeared in PrimeResi in July 2015. It was written by Robert Marchbank, a solicitor in the property department