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Informal or Formal Lease Extension – Which to Choose?
What are the pros and cons of taking the informal path to extend the lease of your flat?
The Leasehold Reform Act provides a statutory framework to lease extension.
Despite this, many leaseholders choose the informal route. This may offer benefits to both the landlord and the leaseholder.
Landlord
Pros
Typically, the landlord might propose that your lease be extended back to its original length, together with an upwardly revised ground rent. This will benefit him in three ways:
1. He will receive a premium for extending your lease
2. The newly extended lease may still be short enough (typically 99 years) to require a further extension in the not too distant future.
3. An increased ground rent, particularly where it is set to double every 25 years, greatly improves the value of the freehold.
Cons
Provided the matter is handled correctly, this approach should always be in the landlord’s favour.
Leaseholder
Pros
The main advantage for the leaseholder is one of smaller initial outlay. The way the lease extension is calculated includes compensation for three elements:
1. Loss of reversion. In other words, the landlord has to wait longer until the lease reduces to zero and the property reverts to him.
The landlord’s wait will be shorter than in the statutory route, which allows an additional 90 years on top of your remaining lease. So the amount you will have to compensate him will be smaller.
2. Loss of ground rent.
In the statutory lease extension, the ground rent is reduced to nil and the leaseholder has to pay compensation. In the informal route, there will be no loss of ground rent, so no additional compensation is payable.
3. In the statutory lease extension, marriage value is included in the calculation if the lease has less than 80 years to run and the landlord gets a half share. This is the amount that the value of the lease increases by being granted an extension.
In an informal arrangement, calculating the premium a lease of less than 80 years remaining, the landlord is likely to include this as part of his calculations.
Cons
1. With only a 99 – year lease in place, the lease will start losing value again within 15 years and a further lease extension will have to be considered, whereas with the added 90 years of the statutory lease extension, most leases will not expire until the mid- 22nd Century.
2. There is no time limit to the process. The landlord is under no obligation to complete the process at any time, or adhere to any initially agreed premium.
3. The landlord can take the position that he insists on your paying his legal and valuation fees, as well as your own. There is no obligation for him to refund these or your own costs should he withdraw from negotiations at any time.
4. Unlike the statutory route, the landlord is not obliged to come to a reasonable settlement or to complete the process within a reasonable timeframe.
5. Following the informal route, you will have no access to the Leasehold Valuation Tribunal. They can compel the landlord to adhere to a timetable, accept a reasonable offer and keep their professional fees reasonable.
6. The lack of a fixed date is hazardous where the lease is approaching the 80 – year mark, as the landlord might demand a higher premium when the lease falls below 80 years.
7. If the informal route is undertaken and then fails, the leaseholder will have to re-commence using the Act. Time and money will already have been spent, to no avail.
A Note on Ground Rent
A typical ground rent on a flat of £200 seems negligible and the leaseholder seeking an extension might consider it hardly relevant when choosing whether or not to take the statutory route.
What may be surprising is just how valuable this can be to the landlord. If the lease is extended to the original 99 years, together with a £200 ground rent that doubles every 25 years, the total benefit in ground rent to the landlord is £73,000.
We have provided the above information as a general guide. We are not solicitors, any quotations of statutory law are not intended to be legal representations, you must always seek clarification from a firm of solicitors who are specialists in this area of enfranchisement law.