I received instructions to give advice to a client who owns a purpose-built flat in a small development in Gosforth. The client owns a leasehold interest in the flat on a 99 year lease which commenced on 1 March 1969 with a non-reviewable ground rent of £15 per annum.
In this particular case the client wished to obtain a lease extension. This is governed by Schedule 13 of the Leasehold Reform, Housing and Urban Development Act 1993 and following payment of premium to the freeholder, enables leaseholders to add a further 90 years to their current lease term with the extended lease being subject to nil ground rent.
In essence, the legislation requires that the freeholder is compensated for the loss in value of his or her interest as a result of the granting of the extended lease.
This is based on a calculation involving the loss of ground rent receivable from the lessee, the deferment of the reversion by 90 years and a payment of 50% of any marriage value if the unexpired term is less than 80 years. In addition, compensation for damage to other property retained by the freeholder or for any other loss or damage resulting from the grant of a new lease can be payable
The subject property had an unexpired lease term of 59 years.
One of the particular advantages of obtaining a lease extension is that the leasehold interest becomes more mortgageable. This is because many lenders impose restrictions on lending where lease terms are shorter.
In this particular case we sought to negotiate a lease extension prior to submitting a legal Notice of Claim under the 1993 Act. Frequently, freeholders or agents acting for freeholders will rebuff this approach as it arguably makes the freehold interest going forward less valuable. This happened in this case. Instead the freeholder offered my client a new lease of 125 years with a premium payable of £3,500. In addition they advised that the ground rent for the new lease would be initially set at £100 per annum and increase/double every 25 years thereafter.
It became apparent that negotiation of terms in accordance with the 1993 Act formula would not be forthcoming and hence, following discussion with the client, I prepared a valuation calculation, and a formal Notice of Claim was submitted by the client’s solicitor to the freeholders in the sum of £5,000.
It is important to ensure that the Notice of Claim is valid and contains all the relevant information. Care must be taken that the proposed terms of the new lease exactly mirror the existing lease terms, save that the lease term will be extended and that the ground rent will be a peppercorn per annum. There have been cases where freeholders have tried to vary the terms of the new lease, for example by excluding the garage.
At this stage I expected to have to enter into further negotiation with the freeholder’s agent, and certainly anticipated having to deal with a counter notice. This did not materialise within the required time period and hence, after further correspondence, the freeholder confirmed they had instructed their lawyers to submit a proposed new lease to my client’s solicitors.
On balance, the outcome was satisfactory from my client’s point of view but the process followed clearly demonstrates the requirement to be robust in your approach and also demonstrates the need to have Lawyers acting for your client who are well versed in the legislation and process.