Formal vs Informal – lease extension and freehold purchase


There are of course, no right or wrong answers to this one, and as I said at the ALEP Spring Conference in March, ‘advice follows the facts.’ Mark Wilson of Myleasehold and I presented a joint debate on the pros and cons of proceeding under the statute as opposed to doing a voluntary deal with your landlord.

I have prepared a summary table that sets out some of the key differences, which may be of interest to those considering a voluntary/statutory deal and for those who attended the conference it may serve as a useful note, as it was not included in the delegate notes.

If you would like to discuss any aspect of this further by all means contact the Landlord & Tenant team by emailing leasehold@bishopandsewell.co.uk or by calling 020 7631 4141 and asking to speak to the Leasehold Reform team.

Formal Issue Informal
  • 6-9 month process minimum probably more like a year (or possibly more) in Central London
  • advantage Tenant – can take time to find funds
  • disadvantage Landlord – has to wait for money and has to put up with valuation date from some months previous – in a rising market you are receiving ‘yesterday’s prices’ when funds are received
  • both parties ‘locked in’ from service of notice – provided steps followed a result is guaranteed – although no certainty over the price at outset
Timing
  • No control over timing – but, could be instant
  • Can do a deal with a third party landlord as part of sale and purchase – pay out of the proceeds of sale – ‘no cost’ – no need to find funds
  • Advantage landlord – instant payment
  • No definite deal until either completion or contracts exchanged – plenty of scope to renegotiate the terms or walk away
  • Deals with intermediate leases – on a lease extension there is a statutory surrender and re-grant
  • Section 58(4) will automatically transfer the charge in a lease extension from old lease to new
  • A statutory approach to valuation – and there is the tribunal if agreement is not reached
  • Landlord’s costs covered under statute – s.33/ s.60 – and also controlled under statute
Technical
  • This can be messy – co-terminous leases where there is an intermediate with a short reversion who is not a party (lease extension)
  • There is the risk that any superior interest to the flat that is not part of the lease of the flat may be enfranchised in a future freehold claim (Lease extension)
  • No compulsion or fixed methodology to agree pricing – open market negotiation
  • Advantage tenant – if a deal is done for sale of a freehold then section 5 Notices can be served under the 1987 Act – a lot easier to accept than dealing with s.13 and the 1993 Act
  • Landlord at risk on costs without undertaking but can seek to recover such costs / costs contribution as it can negotiate for
  • One size fits all solution for lease extension – plus 90 years and no ground rent – ‘universally understood’
  • Statutory control over lease terms
Pricing and key terms
  • Parties are free to agree whatever length of extension they want -advantage tenant – can purchase a ‘top-up’ lease extension of less than 90 years
  • advantage landlord – can keep ground rent – if the deal is good the tenant may ‘pay twice’ if the balance of premium and ground rent is skewed in their favour – higher ground rents may also deter future freehold claims
  • no external control over new lease terms – either side can negotiate to their favour
Landlord can claim roll-over relief on funds received through ‘compulsory’ acquisition under enfranchisement legislation Tax No roll-over relief for landlordQuery whether agreed form notice and procedure resolves this issue – avoidance ?
If the landlord’s assets are held in trust it is likely that the only approach will be under the legislation – advantage landlord – there is a fully defined process under which it is compelled to act – and there is professional valuation advice – in part funded by the tenant as to the ‘correct’ amount to do the deal for. Ability to negotiate If the landlord has / is represented by professional trustees they may well be very reluctant to deal on this basis as there is no evidence that the asset either should be sold or that the price that is proposed/ has been agreed is ‘right’.

Category: News | Author: |