If you are a leaseholder with a lease term which may soon need to be extended, or if your lease contains an aggressive doubling ground rent, you may have been approached by your freeholder voluntarily offering to extend your lease term and/or vary the ground rent payable.
Such offers are usually set out to appear as a quicker, simpler, and less expensive option to a formal lease extension. In fact, this is often not the case and, in this post, we set out the reasons for always bearing in mind the alternative of a statutory lease extension under the Leasehold Reform, Housing and Urban Development Act (‘the 1993 Act’).
A statutory lease extension entitles the leaseholder to an additional 90 years to the existing lease term, a reduction of the ground rent to zero on payment of a premium calculated in accordance with the 1993 Act.
It is often stated that by accepting the offer, the process will be quicker than the statutory lease extension route.
This fails to address several points:
- Such agreements will require the consent of any mortgage lender with a charge over the property, which is not the case with a formal lease extension. This inevitably adds delays to the process.
- It is not uncommon for the other party to drag its feet or become unresponsive partway through the process, once sums have already been paid to the freeholder, for example, for its valuation fee.
- There is no basis for holding the freeholder to any deadlines. The transaction is usually ‘subject to contract’ up until completion and the freeholder can walk away at any point. Whereas under the formal route, statutory deadlines must be complied with.
It is not unknown for communications to break down over related matters such as service charges or alterations, resulting in the need for the formal process to be started, a number of months after a failed voluntary process.
A voluntary deal is often presented by the party offering it to be a simpler, more attractive proposition which will not require the service of formal notices. However, offers made will tend to involve the freeholder keeping a ground rent income, and care should be taken to ensure the saleability of the flat is not affected by any new ground rent agreed. This is where valuation advice is crucial.
Freeholders may offer to proceed with reduced legal and valuation costs with a voluntary offer however this can often be at the expense of agreeing a higher price to extend the lease.
The price payable will usually be the most significant element of the transaction. This is the reason that valuation advice should always be obtained, to guide the leaseholder on whether a better option is to exercise the statutory right to extend the lease for a price calculated in accordance with the 1993 Act.
Under the formal route, there are very few, if any, changes that can be made to your lease other than to add 90 years to the term and reduce the ground rent to nil.
If however a voluntary deal is accepted, care will need to be taken not to agree to onerous new clauses introduced by the freeholder. Again, legal representation is key to ensure that your most valuable asset is not negatively affected by onerous new lease covenants.
Changes to look out for include increased interest rates and fees on late payments along with increased restrictions over subletting.
As things stand, it must always be kept in mind that freeholders are under no obligation to act in good faith, and most voluntary offers to extend the lease will be in the freeholder’s interests. This is not to say that terms can never be agreed without the formal procedure, however, it is a course that must be navigated with care and with the assistance of legal and valuation advice.