Negotiating a lease extension

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    Negotiating a lease extension

    Hi all, I am new to the forum.
    I am looking to extend the lease on a flat (currently under 70 years).
    I received a quote from the freeholder and a valuation from a surveyor (£3k lower than the freeholder's figure).
    I spoke to the leasehold Advisory Service who said to ask the surveyor to negotiate on my behalf. But he is not proactive and not getting back to me. It is all taking ages, with two week gaps between communication.
    I have a solicitor lined up, but I understand it is not their job to negotiate the premium on my behalf.
    My question is: is it acceptable to approach the freeholder myself with an offer? It is an actual person, not a company, with an email address I can contact him on. I wouldn't say we are friendly but on the rare occasions when I had to contact him, he has been responsive and courteous.
    If so, how do I word my offer? Is there a template anywhere I can use?
    Thanks.

    #2
    If there's only 3k in it then there's not really much to negotiate. How about just a friendly email saying you are keen to extend the lease and have had a valuation and would he be willing to meet in the middle.
    But you need to be sure the terms are comparable , ideally adding 90 years at nil ground rent which is what a statutory extension would give you

    Comment


      #3
      Thank you so much for the reply!

      I know 3k doesn't sound much but I am having to sell that property due to personal circumstances and every penny that I can save on extending the lease will count. We are talking 15k versus 18k.
      I will have a solicitor check the terms of the lease. Yes I did see going the statutory route would add 90 years and nil rent but because the properly will be sold, I would be happy with anything like a new 99 years and current rent which will appeal enough to potential buyers.
      I am under the impression that using the informal route could be a bit quicker than the statutory route as we don't have to wait for 2 months or a counter offer etc. So in an ideal world, I could agree on a premium with the freeholder and get the paperwork going with the solicitor. Am I correct?

      Comment


        #4
        Yes if you can agree terms with the freeholder then your solicitor can get things moving. Sounds like you know what you are doing but just make sure the freeholder doesn't try and sneak in any other changes to the lease or nasty rising ground rents. Buyers are much more savvy these days and will be put off by unfair terms.
        The freeholder might want to delay till after 5th April if he's used his CGT allowance this year, or vice versa if he hasn't, so might help negotiate if you can be flexible on timing.

        Comment


          #5
          I believe I read recently that the government is planning to legislate to remove marriage value. Maybe worth waiting if possible?

          Comment


            #6
            Section20z,

            Thank you! I truly appreciate your quick replies and advice!
            Haha, no I don't really know what I am doing It is a minefield really. I just try and arm myself with as much information as possible. If the process wasn't tedious enough, everything is so much slower because of covid.
            Thanks for the tip re. CGT, a bit of leverage is always useful.

            Comment


              #7
              Originally posted by JK0 View Post
              I believe I read recently that the government is planning to legislate to remove marriage value. Maybe worth waiting if possible?
              Yes I saw that too and got all excited but after speaking to various people, including the Leasehold Advisory Service, this just means the government "will" look into it, at some point. We have no idea of timescale etc. I had already read on it a year ago and nothing has changed. If I knew it was coming into effect in the next six months, I would hold off. But it could be months / a year or more before anything happens and unfortunately I can't wait that long.
              Also, every year that goes by, the premium increases, so some of what I would gain on the marriage value I would probably lose in the increasing premium.
              And at the risk of sounding cynical, I would be surprised if no other charge is introduced or there is some kind of loophole. Freeholders make thousands on those leases, I can't see them giving that up without a fight or some sort of "hidden compensation".

              Comment


                #8
                Section20z,

                Actually, I have just realised the surveyor's document has two figures. The calculated premium, which he also calls the "estimated premium at tribunal". That is 15k. Then there is the "estimated figure to serve S42 notice" and that is 11k.
                I am assuming that means if I serve S42, we start at 11k and negotiate up for me, down from 18k for the freeholder.

                So ... if I make an informal offer, is 11k insulting? Should I offer in the middle, 14.5k???

                Comment


                  #9
                  Try offering £11,000 and agree to £12,300 which is the starting point by hmrc for charging capital gains tax at 18% or 28% .

                  Make the offer for 90 years statutory extension and peppercorn ( NIL ) ground rent which is your legal right to seek under the L&T act 1993.

                  Comment


                    #10
                    Thanks for the reply. I don't know if he will go for 12.5k as it would be considerably lower than his original quote of 18k. The surveyor's estimated premium to (which roughly matches results from online calculators) is around 15k.
                    I think I will offer the freeholder 11k. What's the worst that can happen?

                    Comment


                      #11
                      He accepts your offer after he reads this thread :

                      https://forums.landlordzone.co.uk/fo...ro-ground-rent

                      Comment


                        #12
                        If you can reach an agreement with your freeholder all well and good. It is extremely expensive to go to Tribunal so no one really wins except the professional advisors fortunate enough to be hired. If you are pushed from 11.5k to 15k it is still okay in the scheme of things rather than be stuck for who knows how long. The law will take years and years to be changed. The legislation has to go through both the Commons and the Lords. It is not something the Government can do quickly. They could limit fees the amount of the freeholders fees payable by you statutory instrument but that hardly change things much. If you can cut through and do a deal that the f/h will, ideally, confirm in open correspondence so much the better but he may say serve a formal claim and then we will talk to you. The best time to get a lease extension is when you aren't in a hurry. You say your lease has under 70 years. If say 69 years the lease extension probably is worth a tenth of the value of the flat once extended under the current rules.

                        Comment


                          #13
                          The government’s proposals which could impact favourably to you would be the abolishing of marriage value. However, this will of course be a matter of significant push back from the great estates in London and other large landlords holding reversionary leases.

                          A key element in the calculation of the premium is the reversionary value and since 2006 this has been held, except in exceptional circumstances, to be 5%. At the time this rate was agreed the risk-free rate was some 2.25% (The Government own published figure used in injury claims was 2.5% = Ogden Rate) and since then interest rates have collapsed with Ogden rate i.e. the long-term risk-free rate falling from around 2.5% in 2006 to MINUS 0.25%.

                          It is inevitable there will be a challenge to have that deferment rate used in calculating the premium lowered from 5% to reflect this collapse in that long-term risk-free rate. It is highly unlikely to be a drop as high as 2.5% to 3% as this would cause the cost of lease extensions to go to ridiculously high figures. But a modest reduction of 1% so the rate became 4% would more or less compensate the landlord for the loss of marriage value. However, the government could get it an awkward position because a lease of say 83 years would see the cost of a lease extension rise significantly. So, a flat with a ground rent of £250 per annum fixed worth £200k with an 83-year lease would currently pay £7,650 to extend the lease whereas if the deferment rate dropped by 1% to 4% that figure would become £11,890

                          With the Great Estates making it clear they will take the government all the way to the European Court of Human Rights there must be a significant chance that in the “horse-trading” between the government and the interested parties that some reduction in that deferment rate will be made. Also, the government will have known for certain there will be enormous resistance to any changes in the valuation model that they may well have pitched their opening stance quite aggressively in order to ensure that when the dust has settled they have made some progress on delivering their promise to make it easier quicker and cheaper for lessees to extend their lease. I believe the way this may be achieved would be to make the landlord bear his own valuation fees and legal fees on a lease extension if the landlord acquired his interest post 1993 when he would have known that a statutory lease extension was a possibility. With a lessee picking up costs of around £5k for their solicitor and valuer and for the landlords legal and valuation fees this is an area where significant savings could be made

                          Therefore, if the deferment rate was lowered then the abolition of marriage value ceases to become an issue. It also removed all the complexity and arguments over relativity curves, with arguments delving into hedonic regression and again supports the proposal of making it easier and quicker for a lessee to get a lease extension

                          It may transpire that ground rent income is capitalized (according to size) by say 5% to 6% and the reversion at 4%. Marriage value removed.

                          I would pitch the offer on the basis stating, as your landlord will, that you are aware of the proposed government proposals and would make an offer where you offer to do the deal immediately in return for a lower premium. That lower premium accepts the principle that the government changes will make a difference but also recognize that matters will inevitably be challenged, and the government will have to concede on some of its proposals in order to get legislation through a Tory party-controlled parliament.

                          I would suggest you offer £14k and accept a fixed ground rent of £150 per annum for the new term of circa 170 years

                          Comment


                            #14
                            sgclacy - it is a generous offer, I would go for 12 and see how it goes, but I would say 14 k more likely but I would argue about the ground rent to be nil

                            Comment


                              #15
                              I'm always amazed that people can give a confident extension valuation without lease length, ground rent amount or long lease valuation
                              strange

                              Comment

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