Residential Lease Extensions
Why would you need to extend the term of your Lease?
Most residential Leases, historically, were granted for an initial term of 99 or perhaps 125 years. Whilst it is of course possible that a residential Lease could have been granted with a much longer term at the outset, as is increasingly starting to be the case with more modern Leases, this was less common in the past.
There are a number of reasons why it may be necessary to extend the term of a residential Lease, and these are considered below:
- Obtaining Mortgage Finance to fund a purchase
A term of 99 or 125 years may seem like a long time, but the reality is that the vast majority of people purchasing property do so with the assistance of finance, mostly from a bank in the form of a mortgage. The security which the bank relies on for the loan is the intrinsic value of the property, which is derived partly by virtue of the rights granted the Lease – i.e. the exclusive right to occupy the property free from disturbance. This right has a real cash value, reflected in the price that is paid for the property.
Typically, the value of a property with a long Lease will be affected by normal market conditions, and not related to the remaining length of the term of the Lease. However as the term of the Lease continues to decrease this will start to have an effect on the value, meaning that lenders are unwilling to lend on Leases with short remaining terms. The specifics will vary between Lenders but it is common for them to demand a remaining Lease term of between 25 and 50 years plus the term of the mortgage – so this could mean that they will require a minimum remaining term of 75 years (50 years plus a 25 year mortgage) before they are willing to lend.
- Making your property attractive to potential Buyers
It is common practice when trying to sell your property that you would seek to make the property as attractive as possible to potential purchasers. One way of achieving this can be to deal with extending the term of your Lease so that it is not something which will need to be dealt with either as a part of the sale process (in order that the purchaser can secure a mortgage) or in the near future.
- Being in a strong negotiating position
Dealing with the extension of your Lease at an early stage is a positive in terms of dealing with your Landlord. Trying to negotiate an extension, when it is required quickly in order for a sale to progress, can put you at a disadvantage resulting in your Landlord being able to charge a higher premium. Your Landlord cannot refuse you an extension (except in some exceptional circumstances), but if you cannot agree a price for the extension through negotiation, the statutory process by which a price is ascertained can be a long and costly procedure. We consider this process in more detail later in this article.
In light of the considerations outlined above the process of extending the term of your Lease is something which is more likely to come about than many people think.
The basis of a “Lease Extension” within the Law
Whenever an extension to a Lease term is agreed and completed, no matter how the documentation is phrased the tenants are considered, as a matter of Law, to have surrendered their original Lease immediately before the new Lease begins. This rule is based on the doctrine of estoppel, i.e. because the new Lease is inconsistent with the original Lease (because the term of the Lease has changed) the Leaseholder is ‘estopped’ from denying that the original Lease has come to an end.
It is possible in some circumstances to obtain a new Lease which takes effect subject to the original Lease, but this is unusual and can often lead to confusion and other problems arising in the future and is outside of the scope of this article. Detailed advice in this respect can be obtained by contacting us directly.
Sometimes a ‘Deed of Variation’ is used to vary the length of an original Lease. It is not possible to extend the term of the Lease by deed alone, and no matter how a document is phrased it is treated in Law as effecting a surrender of the original Lease by operation of Law and the immediate grant of a new Lease. Accordingly it is often considered best to proceed on the basis of a ‘Deed of Surrender and Re-grant’, if only to avoid confusion over the nature and effect of the document arising in the future.
Negotiated Agreement versus Statutory Procedure
It is possible to reach a negotiated agreement between parties as to the terms of a Lease extension – i.e. the premium which will be payable for the extension and the length of that extension. This approach has some merits above the Statutory Process, the most obvious being the speed in which an agreement can be reached and that you are not limited to an extension term of just 90 years.
However, it is quite often not possible to agree the terms of an extension (normally as a result of a dispute as to the amount of the premium which is payable) and this will necessitate the Leaseholder following the Statutory Procedure contained in the Leasehold Reform Housing and Urban Development Act 1993 (as amended) which will compel the Landlord to grant a 90 year extension at a premium which, if not eventually agreed after expert valuation is sought from a Chartered Surveyor, is set by the Court.
In order to follow the Statutory Procedure you need to be the owner of a ‘long leasehold’ and to have been the owner for a minimum period of at least two years. The Statutory Process is initiated by serving a ‘Tenant’s Notice’, and then completing the process as laid out in statute. Detailed advice as to whether you are eligible to follow the Statutory Process can be provided by contacting us directly. This process is quite complex and we would always advise instructing an experienced solicitor to assist you throughout.
The Lease Extension and your Lender
Varying the term of your Lease while you have a mortgage or other charge secured against it will necessitate obtaining the consent of your Lender. It is unusual for a Lender to refuse consent, as an increase in the term of the Lease will improve their security, but they can often require you to pay them a fee for their consent and will require you to sign a new Mortgage Deed, or Deed of Substituted Security, to protect their lending. Your lender will also normally require you to cover their legal costs in the preparation of these documents.
The practicalities of the Lease Extension
Once the basis of an extension has been agreed between the Leaseholder and Landlord, the Landlord’s solicitors will normally prepare the appropriate documentation to evidence the extension of the term. The solicitors representing the Leaseholder will then agree the form of those documents, any documents and consents required by your Lender, complete the Lease Extension and then register that extension with H.M Land Registry.
It is normal practice for the leaseholder to pay the landlord’s solicitors fee and other costs.
If you are looking to extend a residential Lease, either as the Landlord or as the Leaseholder, the advice of an experienced solicitor is essential. You should contact Paul Flaherty, Will Osmond or Katie Dunbar by email (see below) or by telephone on 020 7583 3434.
Paul Flaherty - p.flaherty@osmondandosmond.co.uk
Will Osmond - will@osmondandosmond.co.uk
