New lease of life

How the Leasehold Reform Act can be used to your advantage. By Ian Hunter

Buying (and selling) a leasehold flat can be a difficult task, particularly if lending institutions believe it to be a wasting asset not suitable for a mortgage.

Sellers can make their flats more attractive, however, by extending the lease before putting them on the market. The Leasehold Reform (Housing and Urban Development) Act 1993 gives leaseholders the right to extend their lease terms. To date, it has not proved to be the nightmare freeholders feared or the god-send for which leaseholders prayed.

Nationwide Building Society insists that before a mortgage is granted, the lease should have at least 30 years to run after the end of the mortgage term. Most other lending institutions have similar requirements. Abbey National will consider granting a mortgage on leases in central London that have a shorter term.

The legal position is that when the lease comes to an end, the property reverts to the landlord, although the option is open to the tenant to negotiate an extension.

The Leasehold Reform (Housing and Urban Development) Act 1993 provides, subject to the satisfaction of certain criteria, tenants of flats with leases of more than 21 years to run with the statutory right to a 90-year lease extension. Broadly, excluded flats are those owned by charitable housing trusts and properties where the landlord has been resident for at least 12 months and there are four or less individual flats in the building.

Tenants wishing to apply for a lease extension must serve notice on the landlord suggesting a premium in return for the lease extension. The landlord will serve a counter-notice either accepting the proposal or setting out counter-proposals. If the parties cannot agree a price, the matter will be referred to the Leasehold Valuation Tribunal.

The premium agreed is paid to the landlord together with his professional fees, which usually include the services of a surveyor and a solicitor. Andrew Scott, a surveyor and partner with London surveyors Lane Fox, explains: "The premium paid should represent the value by which the landlord's interest is reduced, plus the landlord's share of the so-called marriage value. The marriage value is the increase in the value of the flat following the lease extension. The freeholder is entitled to at least 50 per cent of this by way of a premium."

Mr Scott adds: "In some cases, landlords have been able to drag matters out in order to deter tenants from using this procedure. As tenants are liable to pay the landlord's professional fees if the landlord can drag matters out by appealing decisions and challenging the tenant at every juncture, there is a hope that the rising professional costs will deter the tenants from proceeding. Landlords of large blocks of flats will often fight the first tenant who seeks a lease extension particularly hard. If they can establish a high premium for the lease extension, this will be used as a precedent for any other tenants who may subsequently submit an application."

Even if a leaseholder does not have a statutory right to a lease extension because the terms of the 1993 Act are not satisfied, it may still be in the landlord's interest to negotiate.

Part I of the Landlord and Tenant Act 1954 gives a tenant right of continued occupation after the expiry of the lease. The continued occupation may not give the landlord a reasonable yield on his investment and, therefore, he may be prepared to negotiate a lease extension.

Any tenant seeking to negotiate a lease extension should first establish the average term of leases in the area in order to determine whether paying for an extension is a cost-effective exercise. Madeline Simpson, an estate agent with London firm Sebastians, explains: "It may be perfectly sensible to buy a property with a 36-year lease in Belgravia as this is characteristic for the area. To chase a lease of the same length in other parts of London may be extremely unwise."

Ms Simpson says that in Fulham, west London, many clients will not consider a property with a lease life of less than 75 years. "We have one two- bedroom flat valued at pounds 120,000 with 76 years left to run. The freeholder wants pounds 7,000 in order to extend the lease term to 99 years," she says.

"In other cases the landlord is just not interested in negotiating. One client has a fantastic flat which, because it has less than 25 years to run, is simply unmarketable. The problem is the landlord lives in the flat above and does not want to grant an extension and the tenant does not have a statutory right to a lease extension."

Carolynn Davis, a property specialist with City law firm Druce & Attlee, comments: "If a landlord is prepared to grant a lease extension, the tenant should use the opportunity to address any areas of contention, such as repairing covenants and service charges."