Under the provisions of the Leasehold Reform, Housing and Urban Development Act 1993 ("the 1993 Act") qualifying tenants of flats have a right to the grant of a new lease at a peppercorn rent on payment of a premium to the landlord. The term of the new lease will be for a period of 90 years plus the unexpired term of the existing lease.
Why extend your lease?
A lease is a "wasting asset" - the shorter the lease, the less valuable the property and the higher the premium required for extending the lease.
When the unexpired term of the lease has less than 80 years to run, the cost of extending the lease becomes considerably more expensive. This is because the landlord is entitled to a 50 per cent share of the "marriage value". In broad terms, this is the difference in the value of the flat before and after the lease extension.
When the unexpired term of the lease has less than 60 years to run, the property becomes virtually unsaleable as mortgage lenders will not normally advance loans to purchase properties unless there is more than 60 years to run on the lease.
Who is a qualifying tenant?
A person is a qualifying tenant if he or she is a tenant of a flat under a "long lease", i.e. one that is granted for more than 21 years.
To qualify for a new lease, a qualifying tenant must have owned the flat for at least two years. There is no residence qualification, so the right is open to both owner/occupiers and investors alike.
The right to a new lease is an individual right. It is therefore not necessary for the leaseholders in a building to form a group before the right can be exercised.
How is the right claimed?
The right is claimed by the service of a "Tenant's Notice" on the landlord which gives information prescribed by the 1993 Act. Amongst other things, it must specify the premium which the tenant proposes to pay. The premium is negotiable but a realistic premium must be proposed, otherwise the Tenant's Notice will be invalid.
How long does the process take?
In a relatively straightforward case, it normally takes around six months to complete the process of lease extension. It can take longer if it is necessary to make an application to the court or a tribunal.
If you are considering selling your flat, you can pass the benefit of the claim on to the purchaser once it has been served on the landlord and registered at the Land Registry. The purchaser can then proceed without having to meet the two year ownership qualification.
What happens if the Tenant's Notice is invalid or withdrawn?
The 1993 Act imposes strict procedural steps which must be taken within strict time limits. If the Tenant's Notice is invalid or if it is withdrawn, another claim cannot be made for a further 12 months and the landlord will be entitled to his costs of the abortive transaction. In certain circumstances, the Tenant's Notice will be deemed to be withdrawn. It is therefore advisable to seek professional legal advice from the outset.
Is the landlord entitled to a deposit?
The landlord is entitled after receipt of the Tenant's Notice to require the payment of a deposit. This may be 10 per cent of the premium proposed in the Tenant's Notice or £250, whichever is the greater. The tenant may give notice to the landlord for the return of the deposit if the Tenant's Notice is withdrawn. However, the landlord may deduct his costs from the deposit.
What happens next?
The landlord must give a Counter-Notice to the tenant within the time limit specified in the Tenant's Notice which must be not less than two months after its service on the landlord. The landlord may either admit the tenant's right to a new lease or deny the right. The right may only be denied on limited grounds, such as the invalidity of the Tenant's Notice or where the landlord has an intention to redevelop the premises. The redevelopment ground only applies if the lease has less than five years left to run.
If the landlord admits the right, the Counter-Notice must state which proposals are accepted and which (if any) are not accepted. It must specify, in relation to each proposal not accepted, the landlord's counter-proposal.
If the landlord denies the right to a new lease, he may apply to the court for a declaration that the tenant had no right to acquire a new lease. The application must be made no later than two months after the giving of the Counter-Notice. If no application is made by the landlord within that period, the tenant may make an application to the court for a vesting order determining the terms of acquisition in accordance with the proposals in the Tenant's Notice.
If the landlord admits the tenant's right to a new lease but the terms cannot be agreed, an application may be made by either party to the First-tier Tribunal (Property Chamber) for a determination of the matters in dispute.
What if the landlord fails to serve a Counter-Notice?
The tenant may make an application to the court for a vesting order determining the terms of acquisition. An application must be made not later than six months after the date on which the Counter-Notice was required to be given.
What if the landlord is absent?
Special provisions under the 1993 Act apply where the landlord cannot be found or his identity cannot be ascertained. In such a case the tenant must make an application to the court for a vesting order and the premium is paid into court.
How is the new lease granted?
Once the tenant's right to a new lease has been established and the terms of acquisition agreed or determined, the landlord has an obligation to grant a new lease on payment of the premium and any outstanding service charges and ground rent.
The landlord prepares a draft lease and gives it to the tenant who then has an opportunity to make amendments. Once the final form has been agreed, completion takes place.
What about the landlord's costs?
The tenant is liable for the reasonable costs of the freeholder, any intermediate landlord and any third party to the lease. Payment must be made of the costs incurred in:-
undertaking an investigation of the right to a new lease;
the cost of obtaining a valuation; and
the cost of the grant of the new lease
The tenant is not liable for the landlord's costs of negotiation of the premium or the landlord's costs of tribunal proceedings.
These notes are intended for general guidance only and individual advice should be sought as appropriate.
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