The short answer is ‘No.’ It is not essential to use the 1993 Act to extend your lease. It is possible to agree a lease extension by negotiation with the freeholder, however there are many factors to consider when looking at the Formal vs. Informal procedures.
“I have been offered a voluntary deal with an increasing ground rent – the premium seems OK (lower than I was being offered for a ‘statutory’ deal). What should I do?”
This is often a difficult decision to make and depends on a number of factors.
Firstly, you will almost certainly need independent valuation advice. The landlord may well have put forward a ‘deal’ that appears to make sense, but remember a lease with a premium and a ground rent needs to have the correct balance of both to make sure that you do not end up paying for the same thing twice.
Often the freeholder/ landlord will ask the flat owner to pay for a valuation – although the contents of this will not be disclosed to the flat owner and a deal will be presented on a ‘take it or leave it’ basis. Of course, this is entirely correct, as if you want to carry out a ‘voluntary’ deal, then this reflects the true position because unless you can both agree the terms then no sale of a lease extension is going to be possible.
A lot of landlords put forward terms that are very similar to those available under the 1993 Act, or that include ground rents similar to the terms of the existing lease. These can often represent good value, for the reasons discussed below.
From a landlord’s perspective, ground rent is what gives the freehold long-term value. Increasing, or keeping a ground rent may mean very little to the flat owner and often if the deal is ‘right’ there can be a ‘win win’ situation where both the freeholder and the flat owner are happy.
Often an informal deal does have certain attractions. It will be quicker and perhaps the transactional costs will be lower or certainly more contained. If you do not qualify for a statutory lease extension (for instance because you have not owned the flat for 2 years), then this can also may only be the ‘only’ route open to you if you cannot extend your lease under the statute yet and do not want to wait. It might also be that you are selling the property and cannot put a statutory lease extension claim together to hand on to the buyer because they need the lease to be extended by the time they complete because of their mortgage lender’s requirements.
As to what to do if the proposed new lease contains a ground rent, one of the main points to consider is probably your own long-term view. If you are going to sell your property in one or two years’ time then you may not be too concerned about an escalating ground rent in say 15 or 20 years’ time. However, if any new owner (or indeed you, if you keep the flat) wants to purchase the freehold or extend the lease under the 1993 Act then any new ground rent will have to be ‘bought out.’ If the rent is small, this will not be a big factor, but if the ground rent were to double, say, every 15 or 20 years and starts out at £250 per annum then rises, say to £250, £500, £1000, £2000 the amount will be much more significant.
Solicitors have a duty to report any ‘onerous’ ground rent provisions to mortgage lenders and the test is essentially whether the ground rent imposed will affect the marketability of the property. If the rent is low now, then this is unlikely to be a problem, but it has to be borne in mind that at some point in the future this is likely to be a bigger issue. Whether a rent is likely to affect marketability is really a question for a valuation professional.
If the proposed terms include a ground rent, then it is very probably worth getting this checked out to ensure that the transaction represents fair value. If you are looking for a recommendation for a surveyor or valuer to assist you, then of course your solicitor (if expert in this field) should be able to recommend someone suitable, you may also be able to find details of suitably accredited valuation professionals on the ALEP website.
- Find more information about lease extensions.
If you want to sell a lease extension, the first thing you need to know is that you are probably going to need valuation advice from a surveyor properly qualified in this area.
The price that should be charged for the lease extension needs to be agreeable to both parties. It may be possible to arrange for a joint instruction of one valuer who will provide an opinion on the ‘fair’ price to be paid for the lease extension.
Alternatively, you may simply ask the Valuer to work for you as landlord. If this is done the report prepared does not need to be disclosed to the flat owner.
However, the costs of this valuation should be paid for by the party requesting the extension. As such your surveyor’s or valuer’s fees should either be paid upfront by the paying party or a solicitors’ undertaking should be obtained requiring them to pay these within a specified time frame.
You may also wish to consider the terms to be offered – ie. the mix of premium and ground rent – for instance, will you offer terms similar to that available under the 1993 Act or will you offer a lease extension back to 125 years or 99 years possibly retaining a ground rent ? You will require specialist advice to make this decision – and may need a suitably qualified solicitor to advise on the best way to achieve terms and the difference between them.