Extending a lease as part of buying or selling a flat.
When buying or selling a flat it is possible for a seller to serve notice of a lease extension claim on the landlord before completion and assign or transfer the benefit of it. This is particularly useful if the lease term is “short” or if property prices are rising or likely to rise.
“Short” in this context means a lease which is either already below 80 years or which has around 85 years or less left (particularly where the lease term will fall to 80 years or less in the 2 years after completion of the purchase.) When a lease term falls below 80 years part of what is known as a “marriage value” is payable to the landlord. Marriage value is the increase in the value of the property which is created on completion of the new long lease. In simple terms this could mean the leaseholder has to pay around 50% more to extend the lease.
Why do this?
From a seller’s perspective:
- It makes the property more attractive to prospective buyers who may be enticed to purchase the property; obtaining the benefits below.
- The property may command a higher price.
From a buyer’s perspective:
- They can proceed with a claim straightaway and not have to wait for the usual two years before making their own claim. (The two-year ownership rule, may be abolished in the future, but it is a requirement at the time of writing.)
- The price payable to the landlord may be lower than if a buyer waited for 2 years after purchase, depending on the lease length and market conditions. This is because the valuation date for the purposes of calculating the statutory price is fixed at the date the notice is served.
- The benefits are particularly significant where the lease term will fall below 80 years before or shortly after the expiry of the 2-year qualifying period – see above regarding marriage value.
- There may be special benefits if there is a very short lease, particularly in Central London, where there is often a considerable potential profit for investors.
How does it work?
- The seller obtains a valuation from a specialist valuer who gives their opinion of the likely price to be paid to the landlord for the lease extension.
- During the conveyancing process the prospective lease extension claim is assessed and, if all is in order, a notice prepared. Special clauses are put in the sale contract to reflect this.
- The seller serves the notice (at the direction of the buyer’s solicitors) usually after exchange of contracts but, in any event, before completion.
- The benefit of the notice is assigned to the buyer on completion of the sale.
- The landlord is likely to ask for a deposit of 10% of the price quoted in the notice and, depending on timing, this is either paid by the seller and reimbursed by the buyer or simply paid by the buyer direct.
- The buyer’s solicitors notify the landlord of the assignment and then continue with the lease extension process.
- At the end of the process the buyer obtains new lease which for the term of the remainder of the existing lease plus 90 years; the ground rent is reduced to a peppercorn (i.e. nil.)
Great care must be taken to make sure, in particular, that the notice is correctly drafted and served. Similarly, the wording of the special contract clauses and assignment require careful drafting. Overall, the assignment procedure as a whole must be followed correctly otherwise there is a risk of the notice or assignment being invalid.
Druces has a team of property experts – including specialist lease enfranchisement lawyers – who are very familiar with these claims. Where we act for a buyer in this situation we often assist the seller’s conveyancer, who may not necessarily be familiar with lease extension procedures, and will guide them through the process.
Further information on the lease extension process can be found here. https://www.druces.com/faqs-lease-extension/.
For further information please contact Chris Sykes or Michelle Goodrum.