Residential Property Partner Melanie Verth explains when and why a lessee should consider extending their lease.
In residential property a lease is the document governing ownership of a property, through which a landlord allows a tenant to occupy the property for a set term, traditionally for a period of 99 or 125 years. The lease includes many obligations and rights which are entered into by both the landlord and the tenant and which regulates the relationship between the two.
It is usual for a ground rent to be paid to the landlord. This brings an income to the landlord on a yearly basis. Ground rent can range from lease to lease and, along with the length of term of the lease can be a significant consideration when looking to deal with an extension of the lease.
A lease is a wasting asset, meaning that its value reduces with time. The fact that the property itself is in good condition and remains the same physical asset that was purchased does not matter; the value of a property with a short lease will reduce considerably as time passes. There are other reasons to ensure that you have the longest length of lease possible in addition to preserving your asset, mainly that the longer the lease is on a property, the easier the property will be to mortgage or to sell.
Mortgage lenders are sensitive to short leases and any potential purchaser or owner wishing to re-mortgage may find it difficult to secure lending on a short lease. There are no set criteria as to what a “short” lease is but it is generally considered that a lease with a term of below 80 years may be problematic.
The law allows certain tenants to extend their interest in long leases. The law does not apply to short-term tenants renting a property under an Assured Shorthold Tenancy or similar. The Leasehold Reform Housing and Urban Development Act 1993 (‘the Act’) sets out the statutory procedure for lease extensions. The Act entitles qualifying lessees to obtain a lease extension to their lease for an additional term of 90 years beyond the current expiry date of their existing lease and to have any ground rent reduced to a nil rate. This is available to a lessee in return for payment of a premium which is calculated under a formula set out in the Act.
Since the competing interests of the landlord and tenant change, depending on how long is left on the lease, both landlords and tenants should be aware of their rights and obligations under this area of law.
Every tenant should ensure that they are aware of the length of their lease and take early action to extend, to ensure that unnecessary costs and premiums are avoided. Once the lease is extended under the Act, its value will be enhanced. The property will become more attractive to buyers and mortgage lenders alike.
We have prepared a Briefing Note which includes outline information on statutory lease extensions and the relevant criteria that need be met before applications are made. It is however, also possible for voluntary lease extensions to be agreed between landlords and tenants and this may be an attractive alternative which can save costs and time. It is always advisable to obtain the best legal advice in relation to your individual circumstances before proceeding with any course of action.
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