Leasehold Consultation on Lease Extension Reform
by Tarjinder Rayat — Posted on 11 September, 2019
Leasehold consultation raises the question: Should you request a lease extension now or wait for reform?
What is the current law regarding lease extension?
It is estimated that around 4-5 million people in England and Wales are leasehold property owners. Leasehold property means that the tenant owns the property (the leasehold) but not the land on which the property is built (the freehold). Therefore, there will be a lease agreement in place with the freehold owner. These agreements usually last for 99 or 125 years, starting from when the property was built. If that lease expires, the property is returned to the freeholder. However, there is a statutory process for lease extension. At present, this involves The Leasehold Reform Housing and Urban Development Act 1993. This Act allows a 90-year lease extension for flat owners that have owned the property for a minimum of 2 years and reduces the ground rent to a peppercorn (zero). A lease extension for a house can only be extended by an additional 50 years under this act; therefore, it might be better to buy the freehold in this case.
Why is the current law a problem?
A 2017 enquiry was carried out by The House of Commons Housing, Communities and Local Government Committee. It concluded that some of the key areas of concern with leaseholds were: skyrocketing ground rents; unreasonable lease extension costs and the overall future of leasehold tenure. Here we will take a look at why these areas are so problematic.
Obstacle to securing a mortgage and selling
Once the unexpired lease becomes less than 70 years, potential buyers will find it difficult to find a lender to accept them for a mortgage. This is because to the lender, it makes the loan more of a risk. They may have in place very strict criteria for leasehold lengths.
Therefore, it could be better to complete a lease extension, making it easier to secure a mortgage on the property, rather than wait to see if and how the law is changed.
Starck Uberoi Solicitor’s sister company Starck Uberoi Mortgages can provide specialist mortgage advice tailored to you and your leasehold property. Speak to our Senior Mortgage Advisor Sam Thomas on 020 8840 6640.
Length of time for lease extensions
Extending a leasehold can take anywhere from 4-18 months largely due to delays in obtaining information from the freeholder or their solicitor. Each stage often approaches the maximum amount of time allowed. For example, the initial Section 42 Claim has a period of 2 months and most freeholders reply very close to the 2 month mark. Even when you have completed negotiations and agreed the final premium, the freeholder’s solicitors often move slowly in issuing a new lease. The steps are as follows:
- Step 1 – Inform the freeholder that you want to extend the lease through the statutory process.
- Step 2 – Appoint a lease extension solicitor. Get in touch with Starck Uberoi Solicitors for advice you can rely on.
- Step 3 – Find a valuation surveyor with expertise in leasehold extension legislation and the local property market. Starck Uberoi can put you in touch with surveyors they trust.
- Step 4 – Serve a S.42 notice to your landlord. Read our blog on ‘Serving a Section 42 Notice for a Lease Extension in London’ to find out more.
- Step 5 – Pay the deposit if the landlord requires one.
- Step 6 – Negotiate a price with the help of Starck Uberoi’s trusted solicitors. Read our blog on ‘How to Negotiate your Lease Extension’ .
This process can be made quicker by choosing an efficient legal team. At Starck Uberoi, we offer solicitors and mortgage advisors all under one roof with our Partnership with sister company Starck Uberoi Mortgages , enabling you to receive the most efficient service possible.
Not only is the current process for a lease extension a drawn out one, it also comes at a cost.
The cost of a lease extension is a complex number to work out, and requires expert assessment using the location of the leasehold and the amount of time left until it runs out. To apply even more pressure to this problem, the longer a leaseholder postpones a lease extension the more expensive it gets. A lease extension can start in the thousands of pounds, and this quickly goes up when leases become under 80 years. In addition, every year of delay could increase the cost of a lease extension by 1% of the value of the property.
Ground rent charges are also subject to these increasing costs. The House of Commons Housing, Communities and Local Government Committee noted this as exploitative because the costs do not reflect the maintenance or service provided to leaseholders. For example, if you have a ground rent clause that stipulates that it must double every 10 years, a starting ground rent of £200 becomes £6400 after 50 years. This makes a property unaffordable, unsellable and unmortageable. For more information on ground rents on leasehold properties, read our blog.
Furthermore, the burden for picking up administration costs lies on the leaseholder. They must not only pay for their own solicitors and surveyors, but the freeholder’s too.
Informal lease extensions
People have attempted to avoid the long and costly nature of the statutory lease extension by turning to informal lease extensions negotiated directly with the freeholder. This method has its own problems however. Although you only have to pay your own legal and surveyor costs, the downsides include: your ground rent could increase; you lose the security and legal protection that legislation provides and you may not get an additional 90 years on the lease but rather it is extended back up to 90 years.
To avoid these pitfalls, you should seek out professional advice. Starck Uberoi’s conveyancing department can assist on any questions you might have about extending your commercial lease. Refer to our lease extension page or call us on 020 8840 6640.
What has Scotland done?
Scotland paved the way for leasehold reform with The Long Leases (Scotland) Act 2012, which created ‘Commonhold’ ownership. This transforms leasehold interests into freehold-like ownership and thus today there are a diminishing number of flats owned as leasehold interests. However, since Scotland abolished the Feudal System back in 2004 and allow horizontal division of property, England could not just simply copy and paste this system into legislation; a lease structure would be required.
What are the proposed changes?
The issue of leasehold reform is surrounded by reports and Government enquiries at the moment, bringing a range of proposed changes. Overall, the Law Commission and the Government wants to make enfranchisement, the process of lease extension or buying the freehold, an easier and cheaper one.
In a Government response to how lease extension could be made a quicker process, they recommended reducing turn around time for freeholders and managing agents to no more than 15 working days. This would greatly reduce the amount of time a lease extension takes from the current estimate of 4 – 18 months.
The Law Commission is currently analysing its consultation paper on leasehold reform to publish a report this year. Specifically relating to leasehold extensions, the following changes have been proposed:
- End the requirement that leaseholders need to have owned the lease for two years before requesting a lease extension.
- Reduce the amount leaseholders pay to buy their freehold or extend their lease, while providing landlords with compensation.
- Create one simple procedure for leaseholders to buy the freehold or request a lease extension. This removes the complexity of the current processes.
- Reduce disputes over unclear terms between landlords and leaseholders by clarifying the terms on which a freehold is purchased or a lease extended.
- Establish a fixed cost regime to control the high costs associated with a lease extension, and end the requirement of leaseholders paying their landlord’s legal costs.
The Government also commissioned an inquiry from the Housing, Communities and Local Government Parliamentary Select Committee which concluded this year. The report outlined that the Government could introduce new legislation to address the costly and complex nature of lease extension and also tackle unfair existing ground rents by setting the ground rent of new leases to a peppercorn. A standardised government form for service charge invoicing and another for developers to use when selling was also suggested by the report. The report recommended adopting commonhold interest, when an estate is collectively owned by the homeowners, becoming more widely used in residential homes. This would eventually render leasehold as a tenure redundant. However, this wouldn’t be appropriate for developments where residential owners share a block with commercial owners.
A Leasehold Reform Bill has been introduced into parliament, but a second reading is still yet to be announced. Some of the key features of this bill aim to benefit the leaseholder and protect their asset. These measures include simplifying the lease extension process; holding landlords responsible for their own costs; allowing leaseholders to collectively purchase the freehold of the building and tackling unfair leasehold terms.
Who benefits now and who will benefit from the changes?
At the moment, owners of freeholds are benefitting the most from the current rules. The commission was asked by the government to ‘tick the scales in favour of leaseholders, which highly suggests new changes would benefit leaseholders the most.
When will these changes come in?
It is uncertain when exactly the changes will take place. A year on from our last leasehold reform blog and the Law Commission is warning leaseholders that reform is still unlikely to come about it 2019. Therefore, this is something to keep in mind when deciding whether or not to complete a lease extension.
Should you extend now or wait?
Deciding whether to extend or wait to see what reforms come out will depend entirely on your circumstances. If your lease is coming up to 80 years or you want to sell, a lease extension might be a better option. For the purposes of being able to secure a mortgage on the property, a lease extension might be the best option, as previously mentioned. However, if these circumstances do not apply, it may be best to wait and see what changes are made; keeping in mind that delaying a lease extension will add to the cost of doing so later on.
If you are still unsure about your options, consider contacting one of our trusted solicitors at Starck Uberoi for helpful advice.
How Starck Uberoi can help
Starck Uberoi’s experienced conveyancing department can help you with your leasehold arrangements. For more information please visit our Lease Extension page, or to book an appointment please call 020 8840 6640. We are based in Ealing; our West London Ealing office is located 10 minutes from Ealing Broadway station. For an appointment at our London Belgravia office a few minutes from Victoria Station call 020 7824 5118.