The process and benefits of extending long leases on flats and houses in England and Wales can be both expensive and complicated, along with needing to be undertaken in accordance with the relevant guidance and legal requirements.
Ensuring you have a Chartered Surveyor on-board early in the process can help save you time and money later, in particular should negotiations with the Landlord become protracted.
Below is some simple guidance to assist you when considering extending your leasehold interest in a property, mostly flats, albeit the process is can be similar for other types of residential property. Commercial property lease extensions are covered under different rules and are no considered in this short summary article attempts to outline the main elements.
This note is not intended as a ‘do-it-yourself’ guide to valuing your own lease extension. You should always seek proper professional advice at the earliest possible stage before entering into discussions with the Landlord (Landlord) or otherwise starting the process of Lease extension!
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As the unexpired term (that’s the amount of time left until the lease expires) reduces the value to the Landlord can increase. This is because the value to the Landlord is proportional to the time it takes for them to get possession of the property. For instance, as the term drops below 80 years then the value to the Landlord begins to increase above a ‘nominal’ level and ‘marriage value’ becomes a factor (see below).
Another reason for extending the Lease is that you may wish to sell the property and if there unexpired term is less than 70 years, then a purchaser may well find it difficult to obtain a suitable mortgage and as such the sale may take longer or only those with cash be in the market to buy. This can seriously reduce the sale price and your negotiating position upon sale.
When the leasehold interest in the property has less than 80 years to expiry (the point at which the lease ends) there can be an additional fee payable to the Landlord for their potential loss by extending the lease for a further term. This is known as ‘Marriage Value’.
By way of explanation. When a Lease is extended it adds value to the property and this can be a substantial amount of money dependent upon the circumstances. It is reasonable, if the Landlord (Landlord) is extending the lease to share in the benefit of the extension and under the Provisions of the 1993 Leasehold Reform Act (see below) the Landlord (Landlord) is entitled to at least half of the increase in the value of the subject property and this begins to accrue when there is less than 80 years left unexpired on the Lease. The phrase ‘Marriage Value or Marriage Fee’ is derived from the marriage of two interests, i.e. the value of the property + the additional value attributable for the benefit of that property having a longer Lease, i.e. more security. This is effectively a way to calculate the value of the two interests when combined together, compared to them as separate entities.
So as you can see from above, the trigger point is 80 years for Marriage Value and as such if your lease is approaching this point (being in mind it could take some time to negotiate the extension) you should be considering/started the Lease extension process. The longer you leave the extension below 80 years the higher the Marriage Value is and the more you’ll likely have to pay the Landlord (Landlord) for an extension. See also below.
As you can see therefore, the Marriage Value (Fee) is effectively the compensation the Landlord receives for transferring potential value to another and this is shared 50/50 between the Landlord and the Tenant.
Are you eligible? If you are a Leaseholder who has an unexpired term of 21 years or more on their original lease and who has owned the property for more than 2 years you should be able to apply for the lease to be extended under the provisions of the Leasehold Reform, Housing and Urban Development Act 1993.
The owner, i.e. the person applying for the extension, does not have to occupy the property, but must be the registered owner of it.
How long can I extend if for? A successful application for an extension to your Lease of a flat adds 90 years to the unexpired term (i.e. remaining lease plus 90 years) or if the extension is related to a house then it’s 50 years.
WHAT ARE THE POTENTIAL COSTS?
Unfortunately there is no way to know the costs as these are not set out in the Act, however under Schedule 6 the aspects to be valued are considered and there are usually three parts to this, these are as follows:
The Diminution in the value of the Freeholder’s interest This is essentially the amount of money the Freeholder is potentially going to lose as a result of extending the lease and is made up of the capitalisation of the ground rent and the value of the reversion of the Lease.
Marriage Value (Fee) This is the term used to describe the value created by the merging of the existing leasehold interest into the new and extended leasehold interest, i.e. the difference between the two values and should be calculated by Professional Valuer.
Compensation may be payable to the Landlord (Freeholder) if he suffers a loss as a result of the Leasehold extension. This is likely to be the exception and whilst it should always be a consideration, only rarely arises and as such may not form part of your transaction.Let’s consider these in a little more detail.
Diminution in the value of the Freeholder’s Interest
Capitalisation of the Ground Rent.
This is a calculation based upon the value of the ground rent somebody receives for the unexpired term and is calculated on an actuarial basis.
The reversionary valuation is calculated by considering the value of the flat, less any uplift in its value resulting from improvements carried out by the Lessee or the previous Lessees, such as new kitchen, bathrooms, etc… since the Lease was originally granted. The total figure is then discounted to today, i.e. from the date the Lease would expire. It’s worth noting that as the Lease term reduces, the value of this interest is likely to increase and as such the Landlord could receive more.
Marriage Value (Fee)
This represents the increase in value of the flat following the Lease extension and expunging of the ground rent payable and can be where the debate on value becomes protracted as there are no set-in stone figures. For Leases of less than 80 years Marriage Value isn’t likely to be payable due to the provisions of The Commonhold and Leasehold Reform Act which removed such payments. Below 80 years however it’s likely to be a 50/50 split of the increase in value as a result of the Lease extension.
What’s the Procedure? A Section 42 notice under the 1993 Act is served on the Landlord outlining intention to extend the lease specifying a date for response within two months of the date of the serving of the notice. If the landlord does not respond within the two months or responds late, the Leaseholder can apply to the County Court for a Lease extension on terms set out in the notice within six months from the date the Landlord was supposed to serve the counter-notice.
It’s vital that any notices are correctly drafted and dates are correct and that the notice is correctly served on the Landlord. This is something you should be discussing with your Legal Adviser at an early stage.
What happens if we can’t agree? The Landlord and Leaseholder can agree a deal between themselves, which should be legally drafted and recorded by the respective Legal Advisers, at any point in the process. These negotiations may be based upon the Landlord and Leaseholder’s Valuers’ opinion as to the value of the respective interests and negotiations in this regard is often undertaken between the Valuers who may propose a settlement to their clients, ultimately though it is the Client’s decision on whether they accept a proposed settlement or not. Should they be unable to agree, then an application can be made to the First-Tier Tribunal (Lands Chamber) for determination. Making such an application may be unavoidable in some circumstances, but as skilled negotiations Castle Surveyors Limited would be trying to achieve a reasonable settlement before an application is required, this helps reduce the Leaseholder’s costs (remembering that they will also have to reimburse the Landlord’s costs as well as their own)!
IMPORTANT POINT TO NOTE: Leaseholders can negotiate informally with Landlords but would not have the protection of the Section 42 notice process and cannot therefore refer the matter to the First-Tier Tribunal for determination. It is our recommendation that the formal process should always be adopted first, as an informal settlement may then occur along the path of those negotiations, but at least the Leaseholder would have the ability to fall back on the legal process should the negotiations falter for some reason.