Lease Extension Process

PV formula

The tortuous extension route is set out in Chapter II, Part I of the LRHUDA 1993, which confers (on a qualifying tenant of a flat for 2 years) a right to acquire a new lease on payment of a premium determined by a statutory formula. Except the freeholder does not have to counter with a formula based premium offer.

The new lease replaces the existing lease for a term expiring 90 years after the term date of the existing lease and at a peppercorn rent for the whole term (section 56(1) LRHUDA 1993 ).

The new lease is on the same terms as the existing lease save for some ‘statutory modifications’.

Schedule 13, Part II of the LRHUDA 1993 (as amended), dictates how the extension premium is calculated. Here is the relevant clause:-

Premium payable by tenant

s2. The premium payable by the tenant in respect of the grant of the new lease shall be the aggregate of—

(a) the diminution in value of the landlord’s interest in the tenant’s flat as determined in accordance with paragraph 3,

(b) the landlord’s share of the marriage value as determined in accordance with paragraph 4, and

(c) any amount of compensation payable to the landlord under paragraph 5.

In summary, the premium for a lease extension (excluding fees) is the sum of:

  1. The present value of the income from the ground rent for the remainder of the original term (the whole term of the new lease will be at peppercorn rent);

  2. The present value of the landlord’s reversion interest under the present lease less the value of his reversion interest after the extra 90 years, assuming in both cases a sale on the open market subject to the relevant lease. For the purpose of the assumed sales, the tenant is taken not to be a potential buyer and the 1993 Act is taken to confer no right to acquire any interest in any premises containing the tenant’s flat or to acquire a new lease of that flat.

  3. The landlord’s half share of the marriage value (B-A): –

  • A: the present value of the leaseholder’s interest under the present lease, plus the present value of the landlord’s interest prior to the grant of the new lease, plus he present value of any intermediate interests .

  • B: the present value of the leaseholder’s interest with the new lease, plus the present value of the landlord’s interest once the new lease is granted , plus the present value of any intermediate interests (if remaining).

The determination of the premium therefore requires separate valuations of the existing lease and the new lease, and of the landlord’s interest in the flat before and after the grant of the new lease.

The 1993 Act does not require a formal valuation for making an offer in the Tenant’s Notice. The offer does not need to be the valuation, and there is no legal obligation to reveal the details of the valuation. The leaseholder must make a realistic offer. The landlord is free to counter with any amount. It seems rather unlikely to be based on a valuation. Bizarrely, the leaseholder still pays for both valuations.

The Diminution in landlord’s interest

The valuations are frozen at the (relevant) date of the Tenant’s Notice. Obviously there is a slight handicap as there is no actual market sale and even if there was one for the same flat, the court’s can ignore it (weird you might think).

S2 explains that the landlord’s diminution in value is the difference between what he enjoys under the current lease and what he will enjoy (or maybe not) under the extended lease. S/he will not be required to lose out by a penny farthing. That is the point.

s3(2) says the landlord’s interest is “the amount which at the relevant date that interest might be expected to realise if sold on the open market by a willing seller (who is neither the tenant nor any owner of an intermediate leasehold interest).

S3(2) also prescribes assumptions in this theoretical freeholder’s sale potential:-

(a) the vendor is selling for an estate in fee simple (in simple English selling freehold) or maybe as leasehold “as the case may be”;

(b) the 1993 Act confers no right to acquire any interest in any premises containing the tenant’s flat or to acquire any new lease;

(c) any increase in the value of the flat which is attributable to an improvement carried out at his own expense by the tenant or by any predecessor in title is to be disregarded;

(d) the vendor is selling with and subject to the rights and burdens with and subject to which the relevant lease has effect or (as the case may be) is to be granted.

Just to throw smoke on the water, s3(4) “hereby declares” (which suggests somebody wanted this point to be crystal clear, given an Act of Parliament is pretty much all declarative, surely?) that the assumptions do not “preclude the making of assumptions as to other matters where those assumptions are appropriate for determining the amount of the landlord’s interest.” In other words, crack on and see what else you can squeeze out of the premium?

Marriage value and no divorce allowed?

S4 covers the rather clever concept of Marriage Value.

Think of this for a second. The lease is sold originally for full market value without need of theological assumptions or even a tribunal. By an arbitrary stroke of a modern quill, the 1993 Act decided that once that lease hits 80 years, the freeholder is entitled to a bonus. This means that for a modest 19% of a 99 year term there is no theological argument about marriage value. Reach 80 years and the freeholder now gets half of any purely theoretical uplift in value if the lease is extended.

The freeholder already gets FULL market value for the ground rent and freehold reversion, and the leaseholder is paying the premium and all costs for the extension.

How and by what reasonable logic was it decided the freeholder could get an extra slice? And this is not the end of the money tree in the extension process.

Essentially the marriage value is the difference between what the existing lease offers (hypothetically in the leaseholder’s case) to both the freeholder and the leaseholder and what the new one will offer them.

Assumptions also apply:

4A(1):

(a) the value of the interest of the tenant under the existing lease is the amount which at the relevant date that interest might be expected to realise if sold on the open market by a willing seller…

(b the 1993 Act confers no right to acquire any interest in any premises containing the tenant’s flat or to acquire any new lease;

(c) any increase in the value of the flat which is attributable to an improvement carried out at his own expense by the tenant or by any predecessor in title is to be disregarded;

d) the vendor is selling with and subject to the rights and burdens with and subject to which any interest inferior to the existing lease of the tenant has effect.

4A(2) repeats that “hereby declared” stuff.

In other words, crack on and see what else you can squeeze out of the marriage value?

The 1993 Act is not finished simply with granting the freeholder full market value for loss of future ground rent, his/her diminution of interest, and a half wedge of the theoretical uplift post extension (leaving the leaseholder to pray they might actually achieve this uplift in a real sale).

S5 deals with the stressful issue for the freeholder of compensation for “any loss or damage” by being forced to extend the lease.

Think of this for a moment. By the arbitrary stroke of a feudalistic quill, the scam edifice of residential leasehold was created. Once a modern law dared to offer leaseholders some relief from vassal servitude to a freeholder (who may invest less than 5% for the privilege of the title as is therefore far from a real landlord in any view), the legislators were at pains to fret over the freeholder’s ‘loss or damage” even after earning a full statutory market value for granting the extension.

I believe the same had to be done for slave owners? It is akin to feeling rather sorry for bankers who bring down the financial fabric of a nation state.

If any part of the 1993 Act paid lip service to the reality that freeholders make a nice profit on first sale of the leases and thereafter invest not a penny farthing, and may even have bought the freehold for less than 5% of the total value of the premises, the seediness of the legislation might be lessened.

Instead the 1993 Act frets in Schedule 13 (5)(1) about :

(a) any diminution of any interest of the landlord in any property other than the tenant’s flat which results from the grant to the tenant of the new lease; and

(b) any other loss or damage which results therefrom to the extent that it is referable to the landlord’s ownership of any such interest.

(3) Without prejudice to the generality of paragraph (b) of sub-paragraph (2), the kinds of loss falling within that paragraph include loss of development value in relation to the tenant’s flat to the extent that it is referable as mentioned in that paragraph.

(4) In sub-paragraph (3) “development value”, in relation to the tenant’s flat, means any increase in the value of the landlord’s interest in the flat which is attributable to the possibility of demolishing, reconstructing, or carrying out substantial works of construction affecting, the flat (whether together with any other premises or otherwise).

The legislators did not blush, apparently, at this utter cynicism. The £leasehold caper offers the full weight of law to buying a freehold from under the home owners and shouting ‘foul’ if those homeowners seek a longer lease because this might hurt the chance to knock the building down and redevelop?

To me this is the most scandalous part of the whole caper.

And I have yet to dig into how the tribunal courts conduct the theological rite of The Valuation. Not to be confused with the mathematical process called The Formula.

Consequences

Lease extensions are a minefield for leaseholders. Whoever designed the statute seems to have had the landlord’s bank balance in mind at every turn (reading Hansard this should be no surprise). There are so many ‘variables’ for a landlord to exploit. This is probably why far too many leaseholders are scared into so-called ‘informal’ lease extensions.

One article on the government funded Lease site leaves me surprised. This article on face value avoids the history that lease extensions were never possible prior to the change in law and supports the notion of ‘choice’, where the leaseholder could be advised to go the informal ‘lease extension’ route.

The problem in this article, in my view, is there is no mention that the choice involves ‘apples and pears’. An informal lease extension offers absolutely no legal protection to the leaseholder, or ability to seek redress if unhappy with the outcome. The result is unlikely to be a like-for-like simple term extension as per the statutory right. It is likely to be a ‘modernisation’ of the original lease, which turns the informal ‘choice’ into accepting a new lease with more onerous, and possibly obscurely written, terms. Not just an extension of term. Seems to me the only party gaining from this informal ‘choice’ is the freeholder. I can see no logic to the article being hosted on the government funded website.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s