Lease Extension Terms
UK legislation sets the terms of a lease extension. The relevant law is Section 56 and Section 57 of the Leasehold Reform Housing and Urban Development Act 1993.
Terms that benefit the freeholder
- Payment of a premium to the freeholder (plus their costs)
- The right to redevelop - more on this below
- Freeholder can claim payment of arrears of any service charges or ground rent that have accumulated (Section 56(3)
Terms that benefit the leaseholder
- An additional 90 years to the existing term (although the government are looking at increaseing this to 990, subject to a higher premium being payable)
- Cancellation of any ground rent for the remainder of the lease
Other terms of a lease extension
Can a freeholder can change the terms of a lease when extending? Although Section 57(1) states that the lease extension should generally have the same terms as your old lease, it does allow for certain modifications. These modifications may relate to parts of the property no longer included, any alterations made, or if the old lease was a combination of multiple leases.
- Section 57(2): Service Charges and Maintenance - The new lease can include terms for payments by the tenant for services, repairs, maintenance, or insurance provided by the landlord. This is particularly relevant if the old lease did not include such provisions or only had a fixed payment arrangement.
- Section 57(3) & (4): Continuation and Modification of Collateral Agreements - Any side agreements related to the old lease should continue with the new lease, but with suitable adjustments. Certain terms like those regarding lease renewal, purchase options, or early termination are excluded from the new lease.
- Section 57(5): Cost Adjustments Post Lease Term Date - If the new lease starts after the old one's term date, there might be additional payments due by the tenant for any cost differences incurred since the end of the old lease.
- Section 57(6): Agreement Flexibility - The landlord and tenant can mutually agree to modify or exclude certain terms of the new lease. This can be done to fix issues with the old lease or to account for changes since the lease began.
- Section 57(7): New Lease Statements - The new lease must contain a statement that it is granted under Section 56 and comply with specific registration rules, especially for land registration purposes. This also means that a mortgage lender does not need to be approached for consent to the lease variation.
An example of a change might be to increase any notice fees for the good management of the building. For example, an old lease might state that the leaseholder should notify the freeholder of any change in ownership or a new mortgage lender. The fre paable could be 10 shillings! These kind of notice fees are unworkable and can lead to poor management of the building as the freeholder will not deal with notices properly. Increasing this fee to say £50 to £100 is a common request.
Landlord's right to development
A key issue with long-term leases, such as those spanning 99, 125, or even 999 years, lies in the potential unfitness of the buildings for habitation over such extended periods. While this may not be an immediate concern for the current generation, it presents a significant challenge for future generations. Their leases might outlast the physical structures they live in.
In the context of statutory lease extensions governed by the 1993 Act, specifically Section 61, landlords are provided with certain rights to terminate leases for the purpose of redevelopment. These rights can be exercised within a 12-month period preceding the end of the existing lease and also within a five-year window following the expiration of the new lease. This provision in the Act is designed to address situations where the property might need substantial redevelopment, potentially in response to the concerns about the long-term viability of buildings under extended leases.
If the landlord exercises this right, the leaseholder will be entitled to compensation - expected to be the value of the flat and potentially any conveyancing costs. Mortgage lenders have no issues with this clause
How long do I have to agree terms?
There is a fixed period of 6 months from the date of the Section 45 Notice to agree terms, as per section 48 of the Act. An application to a tribunal must be made by the leaseholder if terms of acquisition are not agreed prior to the six month deadline.