Leases, how long is long enough?

Leases have been in the press recently for all the wrong reasons.  One issue is rent and that will be the subject of a separate blog; length or ‘Term’ as it is known, is discussed here.

Given that when you buy a property with a remaining lease Term longer than your mortgage and probably longer than you expect to live, what is the problem?

In a nutshell, a number of lenders have become sensitive to lease length; most buyers require a mortgage to purchase and if the property is not easy to mortgage you reduce the pool of potential buyers and that in turn devalues your property as fewer people can buy it.

In general, lenders agree new leases of flats should be 125 years or more at grant and new leases of houses should be 250 years or more.  There is less uniformity concerning the remaining Term of existing leases but recently a number of lenders have specified a minimum remaining Term of 85 at the date of purchase.  This appears to be calculated by taking 80 years (the length at which the cost of extending a lease, for technical reasons, increases dramatically), adding two years which is the time you need to own a lease before you are entitled to extend it by right, and adding a further three years for good measure.

It follows, that anyone buying leasehold property with a remaining Term of close to 85 years needs to factor into their purchase the cost of extending their lease and should they let the Term drop below 80 years before extending that cost will increased dramatically and continue to increase year on year.  Anyone planning to sell with a remaining lease Term of less than 85 years need to extend in good time too, as the process can take a number of months.

* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*

Collective Enfranchisement: Doing A Deal Outside The 1993 Act, Right of First Refusal Consequences

When purchasing your freehold there are two ways in which this can be done; the formal route of serving a Section 13 Notice or an informal approach to the freeholder to ‘do a deal’.

The formal route of serving a Section 13 Notice is governed by the Leasehold Reform, Housing and Urban Development Act 1993 and offers more protection in that once the Notice is served, so long as you meet the qualifying criteria, your landlord has to sell the freehold interest to you.  By dealing with the freeholder outside of the 1993 Act there is nothing to stop your landlord at the last minute refusing to sell the freehold interest to you or trying to ask for an unreasonable purchase price.

However, there may well on occasion be an advantage to doing a deal outside the 1993 Act.  Firstly, your legal fees will be cheaper as there should not be as much work involved so long as terms can be agreed relatively quickly.  Secondly, if you have a reasonable landlord who is willing to offer you a fair deal it is likely to save you both time.  If you are unsure of your landlord’s nature it might be worthwhile approaching them informally first and if they seem unwilling then serve them with a Section 13 Notice.

There are certain things to watch out for before accepting an informal deal where 100% of the flat owners in the building are not participating in the deal.  Under the Landlord and Tenant Act 1987 (as amended by the Housing Act 1996) a landlord who is wishing to dispose of their freehold interest must offer it to the leaseholders in the first instance with more than 50% of the qualifying flat owners being entitled to take up the offer.  This would be done by way of a Section 5A Notice.  So if a landlord is approached informally by someone wanting to buy their freehold they must make sure the other flat owners are not able to force resale of the freehold interest to them after completion by virtue of breaching the 1987 Act.  A landlord that does not serve a Section 5A Notice on their leaseholders before disposing of the freehold interest informally will have committed a criminal offence.

The Right of First Refusal legislation does not apply for freeholds where the landlord is a local authority and to most housing associations.

The new owner of the freehold will have to inform the leaseholders in the building of their assumed ownership in compliance with Section 3A of the Landlord and Tenant Act 1985 outlining the leaseholder’s rights to information regarding the sale.  If the leaseholders believe it has been disposed of in contravention of the Right of First Refusal they would respond to the new landlord with a Section 11A Notice requesting full information of the sale terms.  The leaseholders can force the new freeholder to sell it to them under the same terms as what they purchased it for.  A minority of the leaseholders in the building will not be able to take issue with the transfer.

Leaseholders that do wish take issue with any informal disposal of the freehold interest availing of the Right of First Refusal legislation would have to meet the qualifying criteria of collective enfranchisement.

The Right of First Refusal governance does not typically apply to 1993 Act collective enfranchisement transactions.

If you are a leaseholder who believes their freehold may have been sold illegally and wish to commence a Right of First Refusal claim please contact the Leasehold Services Team at Anthony Gold Solicitors who would be happy to assist.  Or perhaps you are a landlord wanting to dispose of your freehold interest to one or more of the leaseholders or an unrelated third party, please contact us for expert advice.

* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*

Valuing lease extensions became too easy until “Mundy”

Knowing what it should cost to extend your flat’s lease was until May/June 2016 fairly simple for the experts. The valuation approach was based off averaging the established relativity graphs. This put valuation on a stable platform. Flat owners could punch into a lease extension calculator the approximate value of their flat with a long lease and the calculator would output an accurate premium.

The Tribunal changed its adopted approach for assessing relativity for different lease lengths in May 2016 in the Upper Tribunal decision of Sloane Stanley v Mundy and Others.

The primary method of valuation suggested in this decision is to use real world transactions adjusted for 1993 Act rights, where sale evidence is unreliable or unavailable a comparison of the graphs and consideration of which graph ought to apply should be undertaking. The Tribunal no longer favours the commonly used method of averaging the graphs of relativity.

This decision will assist landlords to establish higher premiums and could destabilise the market for short lease sales outside of central London.

Valuation just got a whole lot more complicated.

* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*