Most residential leases are granted for terms of 99 or 125 years in length. There is usually a relatively small ground rental, which may be reviewed periodically. A lease is a wasting asset and as the remaining term becomes shorter, a property may be difficult to sell or mortgage. As a general rule, any lease with less than 70 years remaining can be problematical, although some mortgage lenders are adopting The RICS definition of a short lease as less than 85 years.
Over the years, legislation has given the right to leaseholders to extend their lease by an additional 90 years at a peppercorn (nil) ground rental (in fact, a new lease is granted). In order to qualify, the leaseholder must have owned the property for at least two years, but it is possible for a current owner to serve the relevant notice and assign their rights for a new lease to an incoming purchaser. Executors can also qualify.
The tenant will be liable to pay a premium as compensation to the landlord, who now has a much longer wait to obtain vacant possession of the property. The compensation is the present value of the ground rental lost and the loss of value of the reversion (the full vacant possession value of the property at the end of the lease term). If the lease has less than eighty years to run, the landlord is also allowed to share in the marriage value, which is the value released by combining the interests of both landlord and tenant. This is usually the largest element in the calculation and a lease extension under eighty years can be expensive.
The premium calculations are cumbersome and overly complicated, but most cases are settled by negotiation, particularly with lower value property where costs are a significant factor (the tenant is liable for the initial reasonable legal and valuation fees of the landlord). If the premium cannot be agreed, the case can be referred to The First Tier Tribunal for settlement. At tribunal, both parties are liable for their own costs.
The process can also be undertaken informally with the terms of the lease extension freely agreed between the parties with no requirement for an additional 90 year lease or a peppercorn ground rental. An initial informal approach can be useful, particularly with smaller private landlords and where speed is important as the statutory method can take months to complete.
The formal method of lease extension involves the serving of legal notices within strict timescales. This work is best undertaken by a solicitor familiar with the process.
Another option is for the leaseholders (there must be a majority of qualifying tenants) to purchase the freehold of their building or alternatively, to take over the management. Whilst this option brings control, there is also increased responsibility, which can be onerous, particularly with larger and more complex buildings.
Group enfranchisement can be a long and difficult process and it is important for the participating leaseholders to have a strong organizing committee to push matters along, particularly in larger blocks where many flats are owned by absentee investors (interest can wane quickly). It is essential that the participating tenants enter into a formal participation agreement at an early stage with some financial commitment. As with lease extension, the landlord is entitled to a premium to compensate for the 'forced' sale of its freehold.
Marshalls Chartered Surveyors can help with all aspects of leasehold enfranchisement. Please contact Richard Foulkes MRICS.