What are residential lease extensions?
A lease extension is where the term of a lease is extended in a residential property for a set number of years, usually in return for a premium being paid to the Landlord by the Tenant.
Why would a lease extension be needed?
If the term on a leasehold property has around 80 years or less left to run, the property will become less marketable as many lenders are unwilling to grant mortgages for these properties. This will cause an issue if the Tenant needs to re-mortgage or may limit the pool of prospective buyers if they are looking to sell. In addition, legislation now means that the Landlord cannot charge any ground rent for the additional term granted in a lease extension which also helps to make the property more attractive if it is being sold.
How much will the premium be?
The premium should be established using the property’s marriage value which, in simple terms, aims to reflect the difference in the property’s value before and after the lease extension. Establishing the correct marriage value is a complex matter and tenants seeking to determine what a reasonable premium should be should look to appoint a specialist surveyor. There are also lease extension calculators available online that can help to provide a loose guide.
Are there any other costs?
It is generally held that the Tenant is expected to pay for the costs in relation to any lease extension as it is they who will ultimately benefit. These costs include the Tenant’s legal fees, the Landlord’s fees – administrative, legal costs and valuation fees – the premium and, if the Tenant has a lender, any lender’s costs. There will also be a fee to register the lease extension at HM Land Registry.
Will there be any Stamp Duty Land Tax payable?
This will depend on the premium paid. SDLT is payable at a rate of 3% if the premium payable is higher than £40,000.
How do I arrange a lease extension?
Lease extensions can be carried out either informally or via the process provided for by statute.
The informal process of entering into a lease extension includes negotiating the terms of the extension directly between the Landlord and Tenant and then, once both parties are in agreement, having the terms incorporated into a formal Deed which both parties will then sign with the Tenant’s legal representative registering the completed Deed with HM Land Registry.
If a Landlord refuses to engage with the process or set a reasonable premium, provided the Tenant is a qualifying tenant of a suitable property, they can follow the statutory route. This involves the Tenant serving a notice on the Landlord containing their proposed terms for the Lease Extension. The Landlord then has a minimum of 2 months to serve a counter-notice on the Tenant. The counter-notice can either accept the notice terms, offer alternative terms, claim the Tenant does not qualify for the statutory process or state they are refusing the request as they have the intention to redevelop the building.
The Landlord and Tenant then have up to six months to agree terms. After two months and up to the six-month deadline, either party can apply to the Tribunal for an independent decision. Once terms are agreed or the Tribunal has given its ruling, the Deed is drafted and entered into before being registered at HM Land Registry.
What is a ‘qualifying tenant’?
In order to be eligible to extend a lease via the statutory process, the tenant must have owned a property with a residential lease with a term that was longer than 21 years when it was originally granted. The Landlord must not be a charitable housing trust and the property must not be being used for commercial purposes.
Are there any other considerations?
Each lease extension should be reviewed on a case-by-case basis as they are all likely to have their own nuances.
Common things to be aware of include:
- Is there a lender involved? If so, a Deed of Substituted Security may be required alongside the lease extension itself
- Is the lease an older lease? If so, it is important to check that none of the other terms need to be amended in order for the lease to comply with the current legislation
- Are there any timing constraints? If the Tenant is extending their lease as part of the sale process, plenty of time should be allowed to resolve any issues.
If you are considering a lease extension, please contact our team who will happily answer any queries you may have.