Buying flat- 81yrs. unexpired- how to force extension?

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    Buying flat- 81yrs. unexpired- how to force extension?

    I would love any advice here as the new buyer is very nervous and is not getting any sleep....

    My friend is buying her first flat and was concerned about the 81 years left on the lease being too short. However, the current owners were in the middle of (along with the rest of the residents) buying a share of freehold with the lease entending to 999 years.

    However, nearing completion, a delay (dispute between residents and landlord) means the freehold purchase has not gone through yet.... also the seller tried it on saying the freehold purchase was to be paid by the new buyer (not they have backed down to their original position)

    So...

    (1) The estate agent says that the £3000 to buy the freehold share has already been paid in to the 'kitty' by the original seller and will be the purchasers on completion (i.e. if the freehold purchase does not go through then the new buyer will get the £3000 back rather than the original owners)

    Is there a safe way of ensuring this is the case?

    (2) If it does not go through, the buyer then wishes to extend the lease herself, but is concerned about how much this might cost. Am I right in saying that there being over 80 years on the lease she can FORCE an extension of the lease back up to 125 without paying the landlord anything (and only paying her own/reasonable solicitor fees)? The £3000 above hopefully will cover it, but again she is concerned the landlord turns around and charges XX-thousands to do it.

    (3) Regarding (2) above, I seem to remember she can only force extension of the lease if she has been living there for a year - is this correct? If so, she will need to check exactly what is left on the current lease as it might fall below 80 years at the time of her having been resident for a year.

    Any advice or ways to tackle this most welcome. She has no idea at present so anything will be better than nothing

    Thank you so much

    #2
    I would withhold comment (for lack of expertise!) except for the “lack of sleep” point you make.

    Even before considering the points you raise, is there not some clarity required from the flat vendor and his/her estate agent in particular as to what is being sold and hence what a fair price might be?

    If the collective enfranchisement will proceed so the flat is assured of enjoying a 999 year lease (and an ownership interest on the freehold), is that reflected in the market price being sought on sale? The alternative seems to be a flat with an 81 year lease and no freehold interest - and the market price for that should be materially less. Note also that any dispute between residents (leaseholders) and landlord (as you say is occurring in this case) is very likely to rest upon price rather than anything else: accordingly, the £3,000 set by to meet the costs of collective enfranchisement may prove to be insufficient.

    (Note also, as you allude in point (3), that any collective enfranchisement of flats with leases of less than 80 years suffer additional costs (known as marriage value) (see http://www.publications.parliament.u...210/earl-1.htm, paragraph numbered 3 for a definition or the thread at http://www.landlordzone.co.uk/forums...d.php?t=22061)) of possibly a material amount.)


    As to your numbered points: -

    (1) It would be normal practice for leaseholders arranging a collective enfranchisement to pay funds into some common “kitty” for those funds then to be applied to complete the deal, which failing returned to the payee leaseholders.

    Whether or not this has happened in the particular case you are concerned with, and whether whatever arrangement exist to govern such if this has happened, are matters that will need to be confirmed by the vendor’s solicitor and/or the solicitor acting for the collective enfranchisement. Reliance should not be placed upon the representations of the estate agent.

    It is unclear where your friend has reached in the acquisition process and hence what steps might be appropriate to verify the vendor’s estate agent’s representations. If she is contemplating making an offer or has just made one (subject to contract) then it would be appropriate to ask for some written assurances, preferably from the vendor’s solicitor, that what she has been told is the case and would be expected to be reflected in a subsequent sale and purchase contract. The reason for doing this is that she should not wish to involve herself in a deal that then unravels, after she has incurred transaction costs through instructed her own solicitor to commence preparations. do not take any nonsense from the vendor or estate agent; insist that this matter of a clear record of the facts is a “deal breaker” and all they are being asked to do is confirm at the outset what they have already said and wish to be believed.

    If she is at the stage where contracts are being drafted, searches undertaken etc. with a view to being ready to exchange and thence complete, then she might confer with her own solicitor at an early stage since the collective enfranchisement process and the monies and arrangements associated with it will be of material importance in the deal. The vendor would almost certainly have to assign to your friend his rights to the £3,000 along with his participation in the collective enfranchisement deal and have this assignment accepted by those other leaseholders involved in that collective enfranchisement. If her own solicitor has not been briefed on these aspects, Monday morning would be a good time to see this happens.

    (If she has (as is not uncommon but to my mind inadvisable) allowed the vendor’s estate agent to choose a solicitor for her (and note that estate agents play the role of being everybody’s friend, but they are not for they are acting for the vendors and not the buyers), she should ensure that she is the one giving instructions to the solicitor and the only one receiving his/her advice. She should make sure such solicitor is in no doubt that she regards herself as his/her sole client in this deal.)

    (2) Any extension of the term of a lease represents a transfer of economic rights and so it is very doubtful that such a step could be undertaken to extend a lease from 80 years to 125 years without payment to the landlord (who is, after all, postponing by 45 years of his right to use the property (obtain freehold reversion)).

    The cost of a leasehold extension is bound up with the market value of the property which figure is not given. If (!) the £3,000 provision is sufficient to meet the costs of any collective enfranchisement now, however, it is a reasonable assumption that it would be sufficient to cover a lease extension to 125 years. Do, however, be alert to the “lease of less than 80 years” point referred to above when marriage value would have to be taken into account (and fifty per cent. of that figure paid to the landlord).

    As for the provisions of statute law governing such a deal, I am unsure. With a warning that houses might represent quite a different case, see http://www.landlordzone.co.uk/forums...ad.php?t=22052 for post #3 by Jeffrey that might be relevant in the case with which you are concerned. Scouring the Long Leaseholds Questions thread may yield an example close to your case.

    (3) Not sure if there is still a time limit - perhaps any can be circumvented per the advice applicable to a house given in the thread referred to under (2) above.


    The main advice would seem to be your friend needs to avail herself of a solicitor well-versed in handling property acquisitions of this type whilst taking a demanding line with the vendor’s estate agent on the provision of complete and accurate information.

    Comment


      #3
      Further to the above response, the statute giving the right to a leaseholder to force extension of a lease is contained in the Leasehold Reform, Housing and Urban Development Act 1993 - Chapter II Individual right of tenant of flat to acquire new lease.

      Per your point (3) there is, per Section 39, a qualifying period of ownership of 2 years -

      39 Right of qualifying tenant of flat to acquire new lease
      (1) This Chapter has effect for the purpose of conferring on a tenant of a flat, in the circumstances mentioned in subsection (2), the right, exercisable subject to and in accordance with this Chapter, to acquire a new lease of the flat on payment of a premium determined in accordance with this Chapter.
      (2) Those circumstances are that on the relevant date for the purposes of this Chapter—
      (a) the tenant is a qualifying tenant of the flat; and
      (b) the tenant has occupied the flat as his only or principal home—
      (i) for the last three years, or
      (ii) for periods amounting to three years in the last ten years,
      whether or not he has used it also for other purposes.
      http://www.opsi.gov.uk/acts/acts1993...-ch2-pb1-l1g39

      Section 56 deals with the granting of a new lease -

      Grant of new lease
      56 Obligation to grant new lease
      (1) Where a qualifying tenant of a flat has under this Chapter a right to acquire a new lease of the flat and gives notice of his claim in accordance with section 42, then except as provided by this Chapter the landlord shall be bound to grant to the tenant, and the tenant shall be bound to accept—
      (a) in substitution for the existing lease, and
      (b) on payment of the premium payable under Schedule 13 in respect of the grant,
      a new lease of the flat at a peppercorn rent for a term expiring 90 years after the term date of the existing lease.
      (2) In addition to any such premium there shall be payable by the tenant in connection with the grant of any such new lease such amounts to the owners of any intermediate leasehold interests (within the meaning of Schedule 13) as are so payable by virtue of that Schedule.
      http://www.opsi.gov.uk/acts/acts1993..._19930028_en_7

      Schedule 13 deals with the valuation - “premium and other amounts payable by tenant on grant of new lease” - see http://www.opsi.gov.uk/acts/acts1993...28_en_29#sch13.

      Comment


        #4
        Originally posted by Michael12 View Post
        My friend is buying her first flat and was concerned about the 81 years left on the lease being too short. However, the current owners were in the middle of (along with the rest of the residents) buying a share of freehold with the lease entending to 999 years.
        Really, your friend's solicitor should be guiding her through the various contractual relationships. Why does that not seem to be the case here?
        JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
        1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
        2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
        3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
        4. *- Contact info: click on my name (blue-highlight link).

        Comment


          #5
          Firstly, thank you Gazou for the depth of your response. This really helps.

          She is in closer contact with her solicitor only now.

          She has decided that she will not complete until the lease has been extended, or she has something absolute confirming there to be no more costs (or what costs) in it occuring later. She does not want to get involved in extending the lease separately later (should the freehold fall through) as to wait 2 year and exit the marriage value period would bring the lease below 80 years in to marriage value...

          We are going to read through your repsonse in more depth now and pose some questions to the solicitor...

          Will let you know how things get on

          Comment


            #6
            Michael12 - thanks for your kind remarks: I hope matters resolve themselves happily.

            I came across this - http://www.newsontheblock.com/articles/20060824_34 which may be of some use, in particular: -

            Who is a qualifying tenant?

            A person is a qualifying tenant if he or she is a tenant of a flat under a "long lease", i.e. one that is granted for more than 21 years.

            In order to qualify for a new lease, a qualifying tenant must have owned the flat for a minimum of two years. There is no residence qualification, so the right is open to both owner/occupiers and investors alike.

            The right to a new lease is an individual right. It is therefore not necessary for the leaseholders in a building to form a group before the right can be exercised.



            How long does the process take?

            In a straightforward case, it normally takes around six months to complete the process of lease extension. It can take longer if it is necessary to make an application to the court or Leasehold Valuation Tribunal.

            However, if you are considering selling your flat, you can do so with the benefit of the claim once it has been served upon the landlord and registered at the Land Registry. That stage is normally reached fairly quickly. The purchaser can then proceed without having to meet the two year ownership qualification.



            How is the right claimed?

            The right is claimed by the service of a "Tenant's Notice" upon the landlord which gives information prescribed by the 1993 Act. Amongst other things, it must specify the premium which the tenant proposes to pay. The premium is negotiable but a realistic premium must be proposed, otherwise the Tenant's Notice will be invalid.

            Comment


              #7
              This bit is not quite true:
              "However, if you are considering selling your flat, you can do so with the benefit of the claim once it has been served upon the landlord and registered at the Land Registry. That stage is normally reached fairly quickly. The purchaser can then proceed without having to meet the two year ownership qualification."

              V has to serve a statutory Notice of Claim [s.42 of 1993 Act] at- or before- exchange of sale contract; include appropriate clauses in the sale contract; on completion of sale also complete a Deed of Assignment; and, asap thereafter, P serves on L Notice of Asignment of the statutory Notice.
              JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
              1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
              2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
              3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
              4. *- Contact info: click on my name (blue-highlight link).

              Comment


                #8
                Big problem - please help? Buying flat with 81 year lease but problems

                This follows an earlier thread a few weeks back…

                I am very sorry for all the questions; my friend is very desperate and her conveyancer is not that experienced in this area.

                My friend is due to buy a £140k 1 bed flat in London having an 81 year lease. Both she and seller want the transaction to go ahead asap.

                The delay has been that the owner (and other flats) has £3k each sitting with the landlord to buy the freehold to 999 years. There was a dispute about terms (landlord forcing owners to use their own managing agent), and today my friend just heard that the Freehold deal fell through and it has actually been sold to somebody else! A real shock…

                The seller has offered a £3k discount (for my friend to extend the lease herself after the transaction goes through), but my friend is concerned about:

                * What it might actually cost – maybe it will be £7k?!? £15k?
                * Particularly as it’s 81 years & she needs to live in it 2 years for the +80 year protection?

                (a) If a lease over 81 years is extended does the owner still negotiate the price with the landlord in the first instance? Or is there a set price that is forced by government legislation? What is the general process?

                (b) Would the likely cost be more controlled and 'estimateable' if the lease is above 81 years than if it was not i.e. would there be less risk of a bad landlord charging a fortune?. What are the basic process/risks.

                (c) I understand that my friend, the buyer, cannot extend the lease while above 81 years as she has to live in the property 2 years before using this protection, by which time it would have dropped below 80 years... Is it therefore correct that the current owner can lodge their right to extend the lease and pass this right to the new buyer with the sale? Generally, how what would be required in this situation?

                (d) If lease is extended at 79 years, can the landlord pretty much charge what they like - does the new buyer have any protection?

                (e) Important one: Can anyone 'guess' what the cost of extending the lease at 81 years (or 79 years) for a 140k 1 bed flat in London? I know it’s a guess and might mean nothing, but it might us gauge the situation.

                (f) As the Freehold fell through when the flats had already paid in £3k each to buy it, and it was sold to another company last minute, can one assume that company wants to make a quick profit and will increase the price? Does the situation make sense?

                (g) I asked my friend to now ask the seller to provide a quote from the landlord detailing how much to extend the lease on her flat will be, however they will not do so as they said the whole block might be doing this together and so she has to wait.

                (h)
                Finally, can anyone think of any ideas - even outside the box - to handle this situation? What are the options?

                Very sorry for the long post…

                Comment


                  #9
                  Two separate threads by same member have been merged here. Do not cause problems by starting continuation threads; use the same one.

                  Comment


                    #10
                    Michael

                    You are in the unhappy position of having to give your friend, the Intending Purchaser, a severe talking to and thereafter she is in the unwelcome position of having to take a very robust line indeed with the vendor and his estate agent and a harsh line with her conveyancer. (This sort of thing becomes very easy after the first few times. )

                    I say this as: -

                    (i) The transaction is or is one of the most important (let us assume) in which the Intending Purchaser has ever been involved, representing a material part of her personal wealth, and yet she is handicapping herself by not seeking appropriately qualified advisors;

                    (ii) The vendor and its estate agent appear to be being less than open and frank (see points numbered 1., 2. and 3. below);

                    (iii) The nature of the transaction is, clearly, not akin to a straightforward freehold conveyance and the “conveyancer” (as you describe the person handling legal matters for the Intending Purchaser) would not appear to be up to the task in hand.


                    Before dealing with your lettered points, I would note: -


                    1. Failed Right to Collective Enfranchisement (RTE) deal - by reason of managing agents dispute

                    This deal, that, as you explain, would have seen the Landlord transfer the freehold to some new entity owned by the leaseholders (who were then intending to grant themselves revised lease terms to provide for an expiry in 999 years time), would normally see fresh managing agents appointed to the extent that the new freeholders/leaseholders did not want to undertake the task themselves. A managing agent, whether connected to a Landlord or not, might be willing to continue in office or might not. Whatever actual constraints there were about whom to appoint, it is not credible that an RTE deal would fail for a reason such as that.


                    2. Failed Right to Collective Enfranchisement (RTE) deal - other reasons?

                    Note that one of the very few reasons a Landlord can reject an RTE initiative is if it can show an “intention to redevelop the whole or a substantial part of the premises” (per Section 23, Leasehold Reform, Housing and Urban Development Act, 1993). If this were the reason, it would be highly material to the Intending Purchaser, clearly.

                    It is perhaps more likely the reason the RTE initiative failed is to do with the leaseholders, but still it would be comforting to know why they withdrew, if it was they that did.


                    3. Sale of Freehold to somebody else

                    If the freehold “has actually been sold” that deal has happened extraordinarily quickly given only some two weeks ago there was apparently an active RTE initiative in progress.

                    If a proposed RTE deal was withdrawn by the leaseholders, I think it is still the case that the freeholder could not sell the freehold to a third party without first complying with the requirements of the Landlord and Tenant Act, 1987 to give the leaseholders notice of such intent and the right of first refusal. The notice period is normally two months, but may be 28 days where disposal is by way of auction (per Section 5 of the 1987 Act).


                    4. Sufficient legal advice

                    The Intending Purchaser must be persuaded to avail herself of advice from a solicitor qualified and practicing under English Law who is experienced in transactions of this sort and who can be made familiar with this transaction. If the “conveyancer“ is not so equipped, but probably anyway, employ without delay someone else who is so equipped or abandon the transaction. Avoid at all costs continuing as now, unbriefed and unguided.

                    In this connection, see Jeffrey’s remarks per his first post above.


                    Concerning your lettered points: -

                    5. Your points (a) and (b) - extending the term of a lease

                    The relevance of more than 80 years term remaining versus a lesser term on a lease being considered for extension is only that the former is priced on a basis that includes reference to ground rent and freehold reversion value whereas the latter includes these elements and marriage value.

                    The price (premium) payable for the extension of a lease term is always a matter for negotiation between the parties but, as you may be alluding to, there is a statutory right enjoyed by qualifying tenants (leaseholders) that provides for an extension of the term by 90 years and reduction of the ground rent to a “peppercorn”.

                    Where such statutory right is exercised, being an Individual Right of Tenant to Acquire a New Lease (per a Section 42 Notice, the Leasehold Reform, Housing and Urban Development Act 1993 - see http://www.opsi.gov.uk/acts/acts1993...30028_en_1.htm), then pricing is referred to in Section 56 which in turn refers to Schedule 13 which lays out the rules. (Clearly, if some other duration is chosen for the extension, one might reasonably expect similar rules to be applied, particularly for tenors of near 90 years. The Schedule 13 rules are required by law, however, only following a Section 42 Notice.)

                    The Schedule 13 rules notwithstanding, there will still be matters to negotiate but the boundaries are constrained. The notable variable will be the then present market value of the leasehold property (perhaps easily verifiable by reference to recent sales of substantially identical properties in the same building), but also to negotiate will be the discount rate to apply to the ground rent valuation and, where marriage value is applicable (less than 80 years to expiry of present lease), the relativity. All of these elements can cause shifts in price, although a Landlord will be constrained by the knowledge the Leasehold Valuation Tribunal can be asked to determine a fair price if one cannot be agreed between the parties.


                    6. Your point (c) - requiring present leaseholder to make Notice of Claim (per Section 42)

                    The requirement is “ownership” not residence but it is two years as you state.

                    Compliance with the requirement is indeed finessed by requiring the present leaseholder (the Vendor) to make a Notice of Claim under Section 42, 1993 Act.

                    See Jeffrey’s post (now immediately above your last following the thread merger) for an explanation of what is required. This helps show why the Intending Purchaser must avail herself of a decent solicitor.


                    7. Your point (d) - extending where present lease has 79 years to expiry.

                    Without the Section 42 Notice (and hence Schedule 13 rules for pricing) from a qualifying tenant (leaseholder), any extension is purely a matter for negotiation, as noted per point 5. above.


                    8. Your point (e) - indicative pricing for extensions.

                    Yes, I can provide indicative pricing.

                    I would hope to do so before tomorrow lunchtime.


                    9. Your point (f) - new freehold owner’s intentions

                    The new freeholder may be hoping that leaseholders will want to extend, either on some negotiated basis or following a Section 42 Notice. This will see it enjoy an acceleration of its expected income receipts from its ownership of the freehold and that may be its principal motivation - although one would have expected this to be priced in to the deal it did with the former freeholder.

                    There is the unwelcome possibility that the new freeholder is intending to redevelop the premises (see point 2. above).

                    In the face of a fresh RTE initiative or Section 42 notices, the new freeholder is as constrained as the former freeholder.

                    The £3,000 contributed by each of the intending participants to the RTE initiative would have remained their monies and has presumably been repaid to them: these funds would not be for the account of the new freeholder, clearly.


                    10. Your point (g) - quote from Landlord for extension

                    The Landlord does not want to reveal its hand as to price in any negotiated deal - nor even indicate what the pricing would be consequent upon a Section 42 inspired deal (as noted in point 5. above, there are still elements to negotiate even then).

                    Note the right conferred by Section 42 is an individual one and therefore the possible actions of other leaseholders are not relevant. Further note that a fresh RTE initiative, which in any case is a leaseholder matter to commence, could not be undertaken again presuming it was the leaseholders who stopped the last, until (if I recall correctly) twelve months have elapsed.


                    11. Your point (h) - alternatives

                    Failure to get a decent solicitor involved (per point 4. above) has contributed to the present state of affairs and if one is not employed now, expect trouble (probably the more severe in due course if the transaction completes!).

                    It would be normal for the Intending Purchaser to have formed an emotional attachment to the particular property but this should be kept in perspective. There are other properties, and in this case it would seem fair to say there are a non-trivial number of causes for concern. These run to the disclosures made by the Vendor and his estate agent and to the true reasons for the apparent end of the RTE initiative. There is the unknown element of the new freeholder. It might be time to walk away!

                    Comment


                      #11
                      The cost of a statutory lease extentsion now assuming the ground rent was £100 per annum will be around £4k.

                      If she buys and then has to wait 2 years before qualifying the figure is around £5k

                      I would suggest your friend does either:-

                      1) Ask the vendor to serve the Section 42 Notice as outlined by Jeffrey and have £6k knocked off the price as by serving the notice she will become liable for the landlords valuation and survey fees which could run into £1k plus a further 1k for her own legal and valuers fees

                      If not

                      2) Ask for £7k off the purchase price

                      I suspect the flat was valued on the basis that the lease would not be an issue so these reductions are logical in the circumstances.

                      It is very much a buyers market and she should be asertive on this matter

                      Comment


                        #12
                        I revert as promised further to point 8. in my last post above (and your point (e)) with indicative pricing for the lease extensions.

                        1. An indication of the prices (premiums) that might be charged for: -

                        - a 90 year term extension made in accordance with Schedule 13 rules (see paragraph 2. below);
                        - subject to the assumptions stated below (and which have a material impact upon the indicative prices);
                        - and before taking into account transaction costs (mainly legal), and any compensation due to the landlord (see paragraph 4. (iv) below);

                        are:-

                        (A) Extension now, with 81 years remaining of the present lease term

                        some £4,031 (Price (A)), as more particularly explained below. This figure is arrived at by calculating the diminution in the landlord’s (freeholder’s) interest as follows, being the difference between: -

                        (a) the value of the landlord’s interest in the tenant’s flat prior to the grant of the new lease

                        - £1,375 being net present value of the ground rent

                        - £2,690 being net present value of the freehold reversion due at Year 81

                        = £4,065

                        (b) the value of his interest in the flat once the new lease is granted

                        = £33 being net present value of the freehold reversion due at Year 171

                        (a) less (b) = £4,031 = Diminution in the Landlord’s interest after extension

                        A significant point about this indicative price is, clearly, that it is materially in excess of the £3,000 set aside by the Vendor to undertake the Right to Enfranchise initiative (which would be priced substantially on this same basis) and now offered in compensation to meet the costs of extension of the lease.

                        The major variable in the calculation (allowing the £140,000 market value of the present leasehold is correct and hence also the values in the calculation for the freehold reversion) is the ground rent. I have assumed this to be a comparatively modest £100 per annum, fixed for the term of the present lease, and discounted at a rate of 7.25 per cent.. This assumption would have to be revised to provide for ground rent of only £25 per annum to give an indicative price of £3,000 and that, of course, leaves no funds from the set aside amount to meet transaction costs etc.. This might explain some or all of why the RTE initiative came to naught.


                        (B) Extension two years hence, with 79 years then remaining of the present lease term

                        some £6,514 (Price (B)), as more particularly explained below. This figure is arrived at by calculating the diminution in the landlord’s (freeholder’s) interest as follows, being the difference between: -

                        (a) the value of the landlord’s interest in the tenant’s flat prior to the grant of the new lease

                        - £1,373 being net present value of the ground rent

                        - £2,966 being net present value of the freehold reversion due at (then) Year 79

                        = £4,339 = Value of Landlord’s present interest
                        (b) the value of his interest in the flat once the new lease is granted

                        = £37 being net present value of the freehold reversion due at (then) Year 169, the value of the landlord’s interest after extension.

                        (a) less (b) = £4,303 = Diminution in the Landlord’s interest after extension

                        and

                        the landlord’s share of the marriage value, derived from the difference between the following amounts, namely—

                        (c) the aggregate of—

                        (i) the value of the interest of the tenant under his existing lease,

                        - £131,275 (being the market value of the present leasehold, see assumptions at point 1, (i) below)

                        (ii) the value of the landlord’s interest in the tenant’s flat prior to the grant of the new lease

                        - £4,339

                        = £135,614

                        and

                        (d) the aggregate of—

                        (i) the value of the interest to be held by the tenant under the new lease,

                        - £140,000 (being the market value of the new leasehold, see assumptions at point 1, (i) below)


                        (ii) the value of the landlord’s interest in the tenant’s flat once the new lease is granted

                        - £37

                        = £140,037

                        Therefore marriage value (d)-(c) = £4,423

                        £ 2,211 marriage value x 50 per cent. (as shared equally Leaseholder/Landlord)
                        £ 4,303 diminution in Landlord’s interest after extension

                        £ 6,514 Premium payable to Landlord on extension



                        NOTE that the assumptions that these indications rest upon and are materially affected by are: -


                        (i) The value of the leasehold property for Price (A) is £140,000 now and for Price (B) is £131,275 two years hence.

                        As your friend the Intending Purchaser will no doubt have in mind, a lease is a wasting asset and at expiry has nil worth: it is presumed by the property market that this characteristic can be ignored where the time to expiry is more than 80 years and so leaseholds of that duration and longer are typically valued as though they were like freeholds. Leases with less than 80 years to run see a diminution in their market value to reflect the comparatively short time to expiry. Property industry sources (surveyors) have established guidance for assessing this diminution, having, so I understand, collected evidence from completed deals. The measure they created is referred to as “relativity” and is expressed as a percentage and should not alter noticeably year to year. The relativity where a lease has 79 years to run is around 93.768 per cent.. Accordingly, the value of a leasehold property with term to expiry of 79 years where a comparable freehold (or property with the benefit of a long lease) is £140,000 would be some £131,275 today.

                        The £131,275 should be adjusted for forecast property price movements over the next two years and any factors know about and specific to the particular property that may affect its value during the next two years. I have assumed for simplicity and in the absence of persuasive evidence to the contrary that property prices will remain unchanged and that there are no factors known about and specific to the property.


                        (ii) The discount rate for valuation purposes applicable to the values used from (i) above is 5 per cent.. This rate has become the standard (following the ruling in Sportelli) and therefore it is unlikely that it would be appropriate to make some different assumption.


                        (iii) That there is ground rent payable under the present lease arrangements, as would be normal. Your post is silent on this point and so for the purposes of calculation I have assumed ground rent of £100 per annum, unvarying over the remaining term of the present lease. This must be subject to capitalisation for valuation purposes and the range of discount rates (Yield rates) used is typically between 6 per cent. and 8 per cent.: I have opted to apply a rate of 7.25 per cent..

                        The calculations above can easily be adjusted by you to accommodate another ground rent, provided any amount is fixed for the term of the present lease. The figure I have used to calculate Price (A) of £1,375 can be replaced with a figure that is the actual annual ground rent multiplied by 13.75 and in the case of Price (B) of £1,373 the comparable multiple is 13.73. These multiples will apply a discount rate of 7.25% still, but that may well be appropriate and some other rate in the range would not make for a significant difference (a few hundred pounds).


                        (iv) The term to expiry of the present lease is now 81 years and the term to expiry of the new, extended lease is an additional 90 years from the extension date, now (for Price (A)) or two years hence (for Price (B)).

                        (v) Price (B) although payable two years hence need not be adjusted to show its value in today’s prices (which could be undertaken thereby to facilitate comparison with Price (A) on a time-value basis).


                        (vi) There are no intermediate interests (e.g. no head lease with the property your Intending Purchaser is interested in enjoying a sub lease).


                        2. As noted in my earlier post, the price (premium) payable for a leasehold extension of 90 years consequent upon an Individual Right of Tenant to Acquire a New Lease initiative is calculated by reference to Schedule 13 which lays out the rules.


                        3. Although that Schedule 13 is clear enough, its clarity tends to be apparent in retrospect after having seen a calculation employing its rules. Help is provided by the Leasehold Advisory Service in its note at http://www.lease-advice.org/publicat...nt.asp?item=10.


                        [More follows]

                        Comment


                          #13
                          [continued]

                          4. You will see from Schedule 13 that 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, being the difference between—
                          (a) the value of the landlord’s interest in the tenant’s flat prior to the grant of the new lease; and
                          (b) the value of his interest in the flat once the new lease is granted.

                          and

                          (B) the landlord’s share of the marriage value, derived from the difference between the following amounts, namely—
                          (a) the aggregate of—
                          (i) the value of the interest of the tenant under his existing lease,
                          (ii) the value of the landlord’s interest in the tenant’s flat prior to the grant of the new lease, and
                          (iii) the values prior to the grant of that lease of all intermediate leasehold interests (if any); and
                          (b) the aggregate of—
                          (i) the value of the interest to be held by the tenant under the new lease,
                          (ii) the value of the landlord’s interest in the tenant’s flat once the new lease is granted, and
                          (iii) the values of all intermediate leasehold interests (if any) once that lease is granted.


                          (“Marriage value” is explained in the Leasehold Advisory Service note referenced at paragraph 3. above. Additionally, courtesy of Lord Hoffman in the recent House of Lords judgement in Cadogan and Sportelli, marriage value is defined as: -

                          When the property to be valued is a freehold subject to a long lease, there is an obvious special purchaser, namely the tenant. The reversion is worth more to him than to others because his lease is a wasting asset, the value of which will inevitably decline to zero unless reinvigorated by extension or merger with the freehold. Thus the value of the lease merged with the reversion is always greater than the sum of the separate values of the two interests. The difference will vary according to the length of the lease: if the unexpired term is very long or very short, so that the reversion or the lease are respectively worth little, the additional value of merger will be low. But when the unexpired term is about to dip below the length which is regarded as adequate security by lenders in the market, it may be considerable. This difference is called the “marriage value".

                          From http://www.publications.parliament.u...210/earl-1.htm, paragraph numbered 3.)
                          (iv) Additionally, “compensation for diminution in value of any interest of the landlord in any property other than the tenant’s flat, or other loss or damage” resulting from a lease extension may have to be paid, pursuant to Schedule 13, paragraph 5 (see http://www.opsi.gov.uk/acts/acts1993...28_en_29#sch13)


                          5. The calculations are fairly simple, relying upon discounted cash flow/net present value techniques. There is a brief illustration of application of the principle in my post athttp://www.landlordzone.co.uk/forums...596#post156596.


                          6. Concerning Price (A) and what the Vendor might offer by way of price reduction from the £140,000 contract (market) price being sought initially to compensate for the fact no RTE has occurred and nor any lease term extension either to keep the lease on a long term basis (i.e. more than 80 years to expiry), note: -

                          (i) The Price (A) calculation revised for a reduced leasehold market price of £137,000 (being £140,000 less the compensation proposed by the Vendor, being equal to the sum set aside to fund his share of an RTE) would see that Price (A) reduced only immaterially, ceteris paribus, to some £3,975.

                          (ii) What provision should be made for legal expenses and other transaction costs of a Section 42 extension I am unsure but any proposal should clearly be for ample amount. Keep in mind the Intending Purchaser will face additional legal costs now, in accommodating the Vendor’s Notice of Claim (which would have to be verified etc.) and the related Deed of Assignment as per Jeffrey‘s advice (referred to in point 6. of the previous post, following your point (c)).

                          (iii) Whilst the expected total costs of a lease term extension might be assessable and could be compensated for (perhaps most easily by the Vendor reducing the contract price), there remains the risk that the Intending Purchaser may not be able to complete a lease extension whilst the term to expiry of the present lease remains more than 80 years. Provided the Vendor’s Notice of Claim and the related Deed of Assignment are perfect, and there are no legal technicalities otherwise that create difficulties, then the expectation must be that an extension would be undertaken. Yet other factors, personal circumstances as yet unforeseeable etc., may intervene to frustrate this. Accordingly, the Intending Purchaser would then face undertaking an extension based upon Price (B). It would be an outrageous cheek to propose this risk is catered for by the Vendor through providing in the sale and purchase agreement for the holding back of some suitable amount of the contract price, to be held in escrow, releasable only when the lease extension is complete, and then either to the Vendor (if the extension is done in time) or as compensation to the Intending Purchaser if she has had to pay marriage value to obtain the extension or been unable by reason of some legal difficulty to obtain an extension. Given how I view the actions to date of the Vendor and his estate agent, I would not baulk at making such a proposal, outrageous cheek notwithstanding. (Note this too comes very easy after the first few times.)

                          (iv) Further to (iii) immediately above, any delay in arranging a lease term extension exposes the Intending Purchaser to the risk that the market value of the property may rise consequent upon revival of prices in the property market generally. Note the biggest single driver in the pricing calculations is the market value of the property and that in calculating Price (B) I have assumed no price increases over the next two years (see point 1.(i) above discussing assumptions). A rise over the next two years totalling 5 per cent. in property prices would, ceteris paribus, increase Price (B) by some £300. Similar risks also arise from future budgets, where perhaps we might see VAT increase along with Land Registry fees etc..

                          Comment


                            #14
                            Lest it is a source of future confusion, per point 6. of my post of yesterday responding to your point (c), concerning the definition of a “qualifying tenant” being based upon ownership not residence, note the law was amended.

                            Section 39 of the Leasehold Reform, Housing and Urban Development Act, 1993 (quoted in response to your original post) was amended by Section 130 of the Commonhold and Leasehold Reform Act 2002, thus

                            Section 39 - Right of qualifying tenant of flat to acquire new lease
                            (1) This Chapter has effect for the purpose of conferring on a tenant of a flat, in the circumstances mentioned in subsection (2), the right, exercisable subject to and in accordance with this Chapter, to acquire a new lease of the flat on payment of a premium determined in accordance with this Chapter.
                            (2) Those circumstances are that on the relevant date for the purposes of this Chapter—
                            (a) the tenant is a qualifying tenant of the flat; and
                            (b) the tenant has occupied the flat as his only or principal home—
                            (i) for the last three years, or
                            (ii) for periods amounting to three years in the last ten years,
                            whether or not he has used it also for other purposes.
                            …..
                            is amended by

                            Qualifying rules
                            130 Replacement of residence test
                            (1) Section 39 of the 1993 Act (the right) is amended as follows.
                            (2) In subsection (2)(a) (requirement that tenant is qualifying tenant of flat on the relevant date), for “is” substitute “has for the last two years been”.
                            (3) Omit subsections (2)(b), (2A) and (2B) (requirement that tenant has occupied flat as only or principal home for three years).
                            ……

                            Comment


                              #15
                              Michael, allowing that nothing is given so freely as advice, I would suggest the Intending Purchaser considers the following. (I offer this as I am outraged on her behalf that she is being ill-served or exploited by, so far as I can judge, everyone else involved - well, aside from you, but who is not really an “involvee” directly.)

                              If, having reflected following the severe talking to that you will be giving her, and in the light of what she then knows, she is still minded to pursue the transaction, she might: -


                              1. Source and appoint a properly qualified and experienced Solicitor as a first priority;

                              (It cannot be disguised that what is needed to drive this deal forward is some hard-nosed, no nonsense, adroit solicitor who will manage the transaction and oblige the Vendor’s solicitor to comply with any and all demands for information, action , drafts etc.. )


                              2. Seek such person’s advice concerning the employment of the conveyancer and, as appropriate, how such employment should be managed if to be continued or ended;


                              3. Avoid calling the estate agent a cheat and a liar and explain to such person: -

                              (i) The transaction is turning out to be materially different from that she thought she was entering, based upon the representations of the estate agent and/or the Vendor and that this is a very disappointing aspect and unwelcome. Despite this, she is minded to try to take the transaction forward.

                              (ii) That she is alarmed by the apparent failure of the Right to Collective Enfranchisement initiative (RTE) and is disappointed that she has clearly not been properly informed about its progress hitherto as she should have been, it having a material bearing on the transaction.

                              (iii) The reason given for the failure of the RTE, that concerning selection of managing agent, is sufficiently unconvincing as to lack credibility. Accordingly, would the estate agent now find out from his client the true explanation and revert promptly (and keep in mind that confirmation of such fresh explanation may well be required from the solicitor to the RTE, depending upon her own solicitor’s advice in due course).

                              (iv) The sale of the freehold cannot have been completed legally without two months notice (or one month if sold at auction). This would seem to cut across the RTE (which, recall, would see the freehold sold to it), supposedly a live deal two weeks ago. Accordingly, the Vendor’s solicitor must promptly furnish all information about this sale, including its current status and the identity of the new freeholder. (No matter that this request will also be made by her own solicitor direct in due course.)

                              (v) The ability to extend the lease term before the present lease exhausts to less than 80 years to expiry has from the outset been an implied element of the deal. With the apparent failure of the RTE, she is aware other provisions are possible to allow her to do this but being persuaded that she can in fact make such extension is a condition of proceeding with the transaction. The estate agent must take note of this and inform the Vendor and if he is in doubt about his ability to provide for this, she is to be informed at once.

                              (vi) The willingness of the Vendor to provide for some financial adjustment in the face of the apparent failure of the RTE is most welcome and has convinced her to endeavour to pursue the transaction to completion. She has sought (but not received) indicative pricing for a leasehold extension (alas such was not forthcoming from the freeholder!) but has been told that the £3,000 will likely prove insufficient. What will prove sufficient she cannot say for now (no figures relating to this should be mentioned at all): she is only being helpful by alerting the estate agent and hence Vendor to the certain need to revise the contract price.

                              (vii) She might disclose she has appointed a new solicitor (and, only if the estate agent chose the conveyancer for her, comment that the conveyancer was not up to handling a transaction of this complexity and is not longer involved).

                              Note that in the course of such interaction howsoever conducted with the estate agent, she should promise nothing, volunteer no additional information, and commit only to awaiting the responses that require enquiry of third parties before an answer can be given.

                              Further note these points under 3. are designed not to cause her solicitor any grief but if she feels she wants to, clearly she might confer with such person before acting. The aim is to update the Vendor and his estate agent with a view to finding out before extra costs are incurred if they are keen to conclude the deal knowing that the Intending Purchaser is going to be demanding a more businesslike approach from them and likely better terms to compensate for the changed circumstances.


                              4. Brief her own solicitor on the transaction and advise such person of the things she has done per 3. above. She could explain her motivation in pursuing the transaction with the aim of identifying with the solicitor’s help those terms and conditions that will be sought and that of not achieved will point to the transaction being abandoned.


                              5. Confer with her own solicitor concerning a timetable and costs.

                              Comment

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