Under the Leasehold Reform Act (as amended) 1993, a leaseholder of a residential property has a right to extend his/her lease for a term of 90 years, plus the residue of any unexpired term, and to reduce the rent to a peppercorn rent (effectively rent free). This is known as a lease extension.
Under the Commonhold & Leasehold Reform Act 2002 leaseholders of a residential property (such as block of flats) have the right to collectively purchase the freehold of the block. This is known as leasehold enfranchisement or collective enfranchisement.
From the freeholder’s viewpoint, he has a valuable asset and will receive investment income for the foreseeable future (from ground rent).
Since the introduction of the Commonhold & Leasehold Reform Act 2002 and Leasehold Reform Act (as amended) 1993, the residency test has been abolished, which means that a leaseholder now only needs to have owned the flat for 2 years before he/she can apply for a lease extension or participate in enfranchisement.
They do not need to live in it to qualify. In addition, if they wish to sell their flat they can also sell on their rights under section 42 of the 1993 act so the new purchaser does not have to wait 2 years to qualify.
In order to exercise either right, a prescribed formal notice must be served on the freeholder and any intermediate landlords. The freeholder then needs to serve a counter notice within strict time scales or must either extend the lease or sell the freehold at the premium stated in the leaseholder’s notice.
However, before the notice is served a valuation must be undertaken, so that a premium can be entered in the notice. This valuation is known as the leasehold valuation.
The freeholder then undertakes his own leasehold valuation so that his formal response can be sent.
Detailed negotiations then often take place to try to narrow the gap between the two leasehold valuations. In order to be successful at this a detailed understanding of the valuation criteria and relevant case law is required.
Leases that have more than 80 years left do not pay any marriage value and so timing of the leasehold valuation and notices can be crucial, in order to minimise the premium payable.
The prescribed process to seek either a lease extension or undertake a collective enfranchisement is complicated and the leasehold valuation involved very complex.
However, a party with good professional representation can benefit significantly as well as ensuring the proper procedure is followed and a thorough negotiation is undertaken. Often, the saving achieved on the premium payable far exceeds the fees payable for good professional advice.
Whether you are the leaseholder or freeholder proper professional representation is essential. The quality of your representation will have a significant impact on the outcome of the negotiations regardless of which party you are.
There is also much case law involved in this area of leasehold valuation and if not properly researched and understood it can cost dearly.
All of our valuers are chartered surveyors and we have helped many landlords and tenants, successfully negotiate their lease extension or collective enfranchisement.
The leaseholder is responsible for both sides’ costs (up to a certain point in relation to the freeholder’s costs) and so the leaseholder must bear this in mind when budgeting.
The freeholder can be comforted in the knowledge that he is able to employ good representation (and therefore maximising his premium) at virtually no cost to himself.