On the 7th January 2021, the Housing Secretary, Robert Jenrick, announced that under proposed Government reforms, leaseholders (tenants) will be given the right to extend their lease by a maximum term of 990 years at zero ground rent.
These proposals come off the back of a Law Commission report in July 2020, which set out recommendations to make it easier and cheaper for leaseholders to extend their lease.
What Is the Current Lease Extension Process?
Currently, under the Leasehold Reform, Housing and Urban Development Act 1993 (‘the Act’) a residential tenant of a flat is entitled to claim for a lease extension of 90 years at a peppercorn ground rent in exchange for paying a premium to the landlord as compensation.
In order to qualify for the extension, however, the tenant must satisfy the following the criteria:
- They must hold the property under a long lease that was granted for a term of more than 21 years;
- The property must be a flat used as a dwelling within a building that is not owned by the Crown, a National Trust or within a cathedral precinct; and
- The tenant must have been the registered legal owner of the lease for at least two years before the claim.
If the tenant meets the qualifying criteria, then they can serve upon the landlord an initial notice under the Act which sets out the premium that the tenant proposes to pay for the extension and starts the statutory procedure to extend the lease.
The premium to be inserted in the notice should be calculated by a surveyor as the method used to determine the value of the extension is complex and, based upon the diminution value in the landlord’s interest in the lease and if the premium inserted in the initial notice is too low, the notice itself can be invalidated.
On receipt of the initial notice, the landlord will then either; reject the claim for the extension, accept the terms set out it in the notice for the extension or serve a counter-notice so as to negotiate the terms.
Once the premium and the terms of the lease extension are agreed, both the landlord and tenant will then proceed to complete the extension and the tenant will be required to register the new lease at the Land Registry.
Any tenant looking to claim for a lease extension under this process is therefore advised to appoint a solicitor and surveyor to act for them on the preparation and service of the notice and the negotiations that follow suit. A failure to correctly follow the procedures set out within the Act can invalidate the claim for a new lease.
How and When Will This Process Change?
Within their report, the Law Commission have recommended that the right for a tenant to extend their lease should be for a term 990 years at peppercorn ground rent rather than 90 years and that the following changes are implemented:
- Marriage value be removed from the calculation of premiums payable for the lease extension as this currently results in those tenants with less than a 80 years left to run on their lease having to pay a significantly higher premium;
- An online calculator is introduced to allow tenants to calculate the cost of extending their lease; and
- The existing proposal for zero ground rents for new leasehold properties be expanded to include leasehold retirement properties.
The Housing Secretary’s announcement however did not give a timetable for when these additional proposals would be implemented, and there was no explanation of how valuations would be calculated following the removal of the marriage value concept.
It is therefore likely that it will several years for these proposals to be implemented and any tenant looking to extend their lease now or in the near future will likely have to do so under the existing statutory process.