April 2009 | Jaffe Porter Crossick LLP
Newsletter
Jaffe Porter Crossick LLP | July 2012
Property Law
Introduction
Share of Freehold vs. Lease Extension
LEASE EXTENSIONS:
The recession does not
necessarily mean all doom
and gloom for flat owners
with
long
leases.
Leaseholders should take
advantage of the low
property values and seriously
consider making a play to get
their leases extended as
subject to a few exceptions;
all long leaseholders who
have held their lease for at
least two years have the right
to renew their lease. The
Leasehold Reform, Housing
and Urban Development Act
1993 (“the 1993 Act”) allows
tenants to extend their lease
by 90 years in addition to the
unexpired term of their lease
at a peppercorn rental.
When can a Lease be extended?
Subject to a few exceptions, all long leaseholders who have held
their lease for at least two years have the right to renew their lease.
The Leasehold Reform, Housing and Urban Development Act 1993
(“the 1993 Act”) allows tenants to extend their lease by 90 years in
addition to the unexpired term of their lease at a peppercorn rental.
Unlike the collective enfranchisement process, the right to renew
your lease is an individual right. You may apply for a new lease at
any time while you have a long lease unless the application is made
during the enfranchisement process; if this happens, your application
will be “stayed” or effectively put on hold, until the enfranchisement
process has been completed.
Under some circumstances, Personal Representatives also have
rights to seek a lease renewal.
How will the low property prices help me to extend my lease?
Once you have established you are entitled to extend your lease, the
next question will invariable be, “how much will it all cost me?”
In broad terms as the length of the unexpired term of a lease gets
shorter, the premium payable to extend the lease increases. For
example, if lease has less than 80 years unexpired then marriage
value is payable to the landlord, which could be significant.
In order to determine the premium payable for a lease extension,
valuation surveyors will use a formulae set out by statute. However,
part of the cost of the lease extension will be determined by the
value of the property at the date the notice of claim seeking to lease extensions is served upon the
landlord. Therefore, property valuations are highly significant when it comes to lease extensions and
leaseholders may be able to take advantage of the currently low property market values.
Another way of obtaining a long lease is to collaborate with other flat owners in the building to exercise
the right to collective enfranchisement and buy the freehold. Once the freehold has been acquired an
extended lease (usually 999 years) will generally be granted to the participants.
What is the benefit of an extended lease?
A lease extended lease will invariable make your property more saleable; the longer the lease term left,
the more marketable your property will be. Also, generally speaking, mortgage lenders are still operating
strict lending terms and usually tend to shy away from lending against leases that have less than 80 years
left to run. Having a long lease invariably makes your property more saleable.
In addition to, a lease extension will generally tend to be cheaper if there are more than 80 years left to
run on the lease. This reason for this is that something called “marriage value” (a valuation concept) will
not be payable. It is not necessary to go into detail in this article about “marriage value” save as to say, in
simple terms, a lease is a diminishing assets and everyday that goes by, the terms of the lease reduces.
The shorter the lease term, generally, the more expensive it will be get your lease extended.
So as you can see, the recession does not necessarily mean all doom and gloom for flat owners with long
leases. Leaseholders should take advantage of the low property values and seriously consider making a
play to get their leases extended.
FREEHOLD:
Do we want to buy the Freehold?
Acquiring the freehold of a block of flats gives lessees the ability to take full control, remove incompetent
managing agents and appoint your own. It enables you to get rid of unreasonable freeholders and at the
same time the possibility of reducing excessive service charges and insurance premiums. It is definitely a
way to ensure value for money as well as protecting your investment. Buying the freehold enables
participating tenants to acquire a 999 year lease at a peppercorn ground rent and a share of freehold.
What does Share of Freehold mean?
Flats within a building are held on a leasehold basis. Collectively at some point in time, the tenants have
bought the freehold of the block of flats usually in the name of a company. Although the individual flats
are still held on leases, the freehold is owned by a company in which all tenants who participated in the
purchase are members.
Each tenant will have a share issued in the company if the company is limited by shares, or a membership
certificate if limited by guarantee.
A flat marketed with a “share of freehold” generally refers to a leasehold flat plus a share in the company
which owns the freehold.
Often, not all tenants in a block will have a share of freehold, but it is sometimes possible for such tenants
to buy into the freehold. A premium will be payable for this but note that a freehold company owned
collectively by the tenants is under no obligation to sell a share in the freehold.
What are the benefits of owning a flat with a Share of Freehold?
The main advantages in owning a share of freehold:
1. the leases can be extended at little or no cost to 999 years at a peppercorn rental (i.e. nil). Do take tax
advice if there has been a considerable lapse in time between the tenants collectively acquiring the
freehold and the property company granting themselves the extended leases;
2. as the freehold is collectively owned by the tenants of the block, any changes to the terms of the
leases that are causing problems (for example, pets or wooden flooring) can be varied so long as the
majority of shareholders in the freehold company agree;
3. the tenants have far more control over the day-to-day management of their building;
4. the tenants have the ability to govern the level of service charges and insurance premiums levied as
they are in control; and
5. the saleability of a flat with a share of freehold is generally increased. Often, a property is an
individual’s most valuable asset and securing a share of freehold will protect it.
Are there any disadvantages?
In larger blocks, always engage the services of a professional Managing Agent who will undertake the dayto-day management of the block. Relying on a group of tenants who collectively own the freehold can be
problematic unless there is professional management in place. Tenants can have differing priorities and
may be uncooperative.
What’s better: RTM (Right to Manage) or lease extensions?
This depends on a number of factors such as the length of leases
and the ability of the participants to fund the purchase of the
freehold. RTM does not improve the quality of title/length of
lease. We often advise clients to undertake a two stage option,
namely group lease extensions or obtaining RTM which may serve
as a precursor to acquiring the freehold.
Disclaimer
We try to ensure that the information
contained in this newsletter is correct.
However, we cannot accept
responsibility for any errors or
inaccuracies unless we have given you,
HEALTH WARNING!
personally, specific advice relating to a
Whether you are extending your lease, going down the RTM route
or considering purchasing the freehold of your block, specialist
legal and valuation advice has to be a must - the process may
sound simple however there are main pitfalls to avoid!
For further information and advice please contact:
Yashmin Mistry
Katie Cohen
t. 020 7644 7294
f. 020 7644 7272
e. ymistry@jpclaw.co.uk
t. 020 7644 7261
f. 020 7644 7272
e. kcohen@jpclaw.co.uk
matter about which you have given us
full background details.
Jaffe Porter Crossick LLP
Omni House
252 Belsize Road
London NW6 4BT
t. 020 7625 4424
f. 020 7328 5840
e. enquiries@jpclaw.co.uk
w. www.jpclaw.co.uk