A
brief overview of the law
The
Leasehold Reform, Housing and Urban Development Act
1993 (“the Act”) enables most lessees
in England and Wales to obtain a 90 year extension
to the term of their lease so long as they have owned
their property for 2 years.
The
process is initiated by the lessee serving a Section
42 Notice (“the Notice”) on the landlord
and claiming the right to extend their lease by a
further 90 years in addition to the unexpired term
of their lease at a peppercorn rental.
A
premium is payable to the landlord for the lease extension
which increases considerably when the unexpired term
of the lease is less than 80 years.
Why
should I extend my lease?
As
the length of the unexpired term of a lease gets shorter,
the premium payable increases.
If
a lease has less than 80 years unexpired then marriage
value is payable to the landlord, which could be significant.
A
lessee may encounter difficulties if they want to
sell their flat if the unexpired term is considered
unmortgagable. Different lenders have different criteria
but generally require an unexpired term of at least
70 years.
What
is marriage value?
This is the potential for increase in the value of
the flat arising from the grant of the new lease.
The Act requires that this "profit" shall
be shared equally between the landlord and the lessee.
The
lessee and the landlord's valuers will rely on local
knowledge and experience to assess the increase in
value in the flat arising from the new lease.
How
do I sell a flat with a short lease?
If
a lessee is selling a flat is willing to serve a Notice
on the landlord to acquire a lease extension and to
assign the benefit of the notice to the buyer upon
completion, an experienced firm is needed to act for
each party. A seller willing to serve a Notice will
find that this greatly assists saleability.
Service
of a Notice upon the competent landlord, who will
in most cases be the freeholder, is undertaken commonly
after exchange. Upon completion, the seller and buyer
execute a Deed of Assignment of the Benefit of the
Notice. This is not the same as a Deed of Assignment.
The Deed enables the buyer to step into the seller’s
shoes upon completion and continue with the lease
extension process as if the buyer had owned the flat
for 2 years.
I want to buy a flat with a short lease, can I extend
it at the same time?
Ideally
a prospective buyer looking to buy a leasehold title
which has 83 years or more unexpired on its term so
that they are in a position should they choose to
do so following completion to apply for a lease extension.
Note that they would need to wait for 2 years from
the date of registration at the Land Registry should
they decide to extend your lease after the purchase
of the property.
If
a prospective buyer is looking to buy a leasehold
property which has between 80 and 82 years unexpired
on its term, it is advisable to ascertain whether
the seller of the property is in a position to serve
a Notice on the freeholder or intermediate landlord
to extend the lease and to assign the benefit of that
Notice to the buyer on completion.
What documents are required?
Whether
a prospective buyer or seller, a Notice will always
be served on the landlord. This should be drafted
carefully to ensure that there are no inaccuracies
or typographical errors. There is no standard form
and it is advisable for specialist legal and valuation
advice to be sought prior to service on the landlord.
Certain
clauses will be included within the sales contract
providing for the seller to serve a Notice and for
the buyer to be responsible for all ongoing costs
in connection with the lease extension.
Further,
the buyer and seller will execute a Deed of Assignment
of the Benefit of the Notice. This has to contain
specific wording that will contemporaneously assign
the lease and the benefit of the Notice to the seller
on completion to enable the buyer to assume the rights
of the seller and continue with the lease extension.
What should I do now?
Enfranchisement
is a complex field of law which should be undertaken
only by specialist leasehold enfranchisement solicitors
and specialist valuers.
If
the Notice is invalidly assigned to the seller on
completion and the lease falls below 80 years, the
premium will increase considerably. Further, the buyer
will be unable to pursue a statutory lease extension
until they have owned and been the registered proprietor
of the flat for 2 years. This can be costly both to
the solicitor who gets it wrong and to the buyer who
has to wait.
In
short, take proper advice to avoid the many potential
pitfalls.
Katie Cohen
www.jpclaw.co.uk
Enfranchisement Department
kcohen@jpclaw.co.uk
020 7644 7261
