If you own a flat with a low lease you may be tempted to open communication channels yourself with your freeholder hoping to avoid or reduce your outlay on legal and valuation fees. If your landlord is a professional portfolio landlord whose mind set is to exploit you from the off you need to take care.
The freeholder may ask you to pay an admin fee up front only to issue you with a non-negotiable inflated proposal.
Even if the deal seems fair it may not reveal the complete picture. Once accepted the extension deed that follows may be layered with adverse clauses that increase your annual service charge and/or that seek to create administration charges for certain future events. When we review the proposed form extension deed we may not be able to recommend to your lender that it is accepted.
Beware of ground rent escalation clauses which can devalue your flat and could cause you problems selling the flat.
Our experience tells us that in more than 50% of cases the client is better off following the statutory procedure under the Leasehold Reform, Housing & Urban Development Act 1993 (the Act) to acquire a lease extension. We can try and place caveats on initial payments to your landlord to try and protect you if you want to try and avoid serving notice, although this is not always achievable.
The guide below may assist you decide which route to go down.
Advantages of an informal agreement
- The legal costs are often lower.
- The process can normally be completed within a shorter time period compared to the statutory procedure.
- There are no time limits imposed on the parties although we would advise that you proceed without delay.
- You may be selling and are content to just top up the lease to get out.
Disadvantages of an informal agreement
- Your landlord is likely to impose a revised ground rent.
- The extension term is probably going to be 99 years or 125 years.
- There is less certainty, as the landlord could change the terms of the agreement or pull out of the agreement altogether at any time.
- You usually pay the landlord's legal costs before their solicitor starts work.
- The landlord has more flexibility to propose less advantageous terms in the new lease (the form of lease issued by the landlord may not be negotiable).
- The professional fees you would have saved by not exercising your statutory rights are usually paid to the landlord in ground rent over the term of the lease or via an inflated premium or both.
- We will need to satisfy your lender that the deal does not adversely affect their security in the flat.
- Your lender may charge you a fee.
Advantages of the statutory procedure
- It's guaranteed.
- You get a 90 year extension of the existing lease term.
- The ground rent reverts to peppercorn (£0).
- The form of new lease is regulated and the landlord's mandate to increase future revenue streams is curtailed.
- The valuation date is locked once notice is serviced, therefore the price of the lease extension stops increasing at that date – this is particularly relevant where a lease is low (approaching or below 80 years) and property prices are increasing.
- The terms of the new lease are governed by the 1993 Act. Therefore if a landlord tries to include unreasonable terms, the leaseholder can apply to the First Tier Tribunal (Property Chamber) and the tribunal will decide the issue.
- If the freeholder’s costs are unreasonable, you can apply to the First Tier Tribunal to have them assessed.
- Lenders consent is not required to register the new lease.
- Besides the initial deposit you must pay under the Act, you do not pay your landlord's “recoverable costs” until the end of the process.
- The deposit is protected.
- Your landlord bears its own costs of the Tribunal proceedings.
- It may be possible to delay concluding agreement of some of the terms of the extension to give you the time you need to save up the premium. At least the premium is locked in whilst you do so.
- Difficult head landlords are removed as an obstacle.
- The extension claim can be assigned to a purchaser of your flat by us.
- If your landlord is absent or non-responsive you can still extend your lease.
Disadvantages of the statutory procedure
- It can take time to complete, normally up to about 10 months.
- The legal costs payable by the leaseholder are generally higher as there is more work involved for both parties’ solicitors.
- The Act prescribes a right of possession in favour of the landlord at the end of the original term and the end of the extended term in very limited circumstances. You would be fully compensated if this right was every exercised.
The best route will depend on your particular circumstances and who the landlord is. Much depends on the length of the lease, the urgency of the lease extension and the position of the landlord. (Some landlords are keen to grant a lease extension outside the statutory framework, Others will try to put the process off in the hope of gaining a higher price later). You are not prevented from trying to negotiate an informal deal just because you have served Notice under the Act. In fact you may find your bargaining position is enhanced.