Real estate things you once knew but may have forgotten: is your tenant entitled to a lease extension?

For those of you who own residential flats let to tenants on long leases, provided your tenant qualifies for and exercises its right to buy a new lease (the "Extended Lease"), your tenant will be entitled to add another 90 years to the time left to run on their existing lease. It is important therefore to be aware, in relation to both currently owned property and future property purchases of the broad outline of the rules of lease extensions governed by the Leasehold Reform, Housing and Urban Development Act 1993 as amended by the Commonhold and Leasehold Reform Act 2002 (the "Act").

Qualification

• In order to qualify, your tenant must hold a long lease - a lease which, when first granted was for a term in excess of 21 years. In addition, your tenant must have owned the flat for a period of two years or more at the date on which your tenant makes its claim.
• Further, your tenant is not limited as to how many leases of flats within the same building he or she may extend nor how many times he or she can commence a claim for an Extended Lease

Terms

• Whilst broadly your tenant will be entitled to an Extended Lease on the same terms as the existing lease, save that the tenant will no longer have to pay a ground rent. You will have redevelopment rights exercisable within 12 months of the expiration of the existing lease or within 5 years of the expiration of the Extended Lease.
• Your tenant will have to pay a premium for the Extended Lease which will be the aggregate of:
• • The diminution in the flat's investment value to you as a result of the Extended Lease
  • 50% of the additional value released by replacing the existing lease with the Extended Lease, but only if the tenant's current lease has less than 80 years to run
  • Compensation for loss of value to other property owned by you

• The valuation date is the date of the tenant's notice of claim

The Procedure

• Your tenant (and you) must strictly comply with the procedure laid down by law. Your tenant must serve a notice of claim which includes details of the premium he or she is willing to pay for the Extended Lease and the proposed terms of the lease. You should be aware that this notice can be assigned to a subsequent purchaser of the flat.
• After the service of the notice of claim, you will be entitled to seek from your tenant a deposit of 10% of the proposed premium. You must then, within a requisite period (stated in your tenant's notice of claim) serve a counter-notice which, if you are not disputing the tenant's entitlement to claim, includes the premium which you would be prepared to accept and the terms on which you are prepared to grant the Extended Lease.
• Unless the terms of the Extended Lease and the amount of the premium can be agreed, your tenant must make an application to the Leasehold Valuation Tribunal within 6 months of the service of your counter-notice whereupon the terms and/or premium will be decided by the Tribunal.
• The tenant is liable to pay your reasonable costs of investigating the tenant's right to an Extended Lease, obtaining a valuation of the tenant's flat and the grant of the Extended Lease. It should be noted, however, that the tenant is not liable for your costs incurred in any proceedings before the Leasehold Valuation Tribunal.

Conclusion

The statutory procedure is complex and contains pitfalls for both landlords and tenants missing relevant time limits and can have disastrous consequences for the party in default. The process is also relatively time consuming and costly. A landlord may wish to consider proposing voluntary terms to tenants who would otherwise qualify under the Act. The landlord may then have more control over the transaction, the terms of the extended lease and give himself a better protection in costs by asking for a non-refundable preliminary deposit from the outset.

For further information please contact Stephen Charnock at stephen.charnock@cms-cmck.com or DDI: 020 7367 2906; or Danielle Drummond-Brassington at danielle.drummond-brassington@cms-cmck.com or DDI: 020 7367 2768