Problems when buying a property needing a lease extension?
So, you have found the dream flat and made your offer and it has been accepted – and then, someone starts mentioning the lease. It had 99 years when it started out but now it is down to 74 years. A pity, if it had been extended before it went under 80 years someone would have saved themselves a pretty penny, but nonetheless, here we are – everything perfect, except for the lease.
So what is the solution? Simple, get the seller to serve a notice seeking a lease extension and have this transferred to you when you buy the flat. Sounds easy doesn’t it?
Well it should be, but there could be a few hiccups along the way – but it goes without saying that you need to get a solicitor on board who knows what they are doing, to reduce the risk of it going wrong and costing you lots of money.
So, what do you need to know? Firstly, make sure the practitioner is an expert – such as an ALEP member. Secondly, have a look at these handy tips for buying a property with the ‘benefit’ of a lease extension:
How the seller can help you avoid a two year wait (and save you money)
Firstly, you are not going to be able to do this unless the seller has owned the property for at least two years and qualifies for the right to extend. If they do, they can pass this right on to you and save you the two year wait (and some increased costs as the lease gets shorter and property values increase in the meantime).
What if they have served a notice already? – that is fine – provided that the claim has not been withdrawn or abandoned. If this has happened they will need to wait a year from the point at which the claim was ‘lost’ before starting again.
What if it is a probate sale? Well, it should still be possible to extend provided that the deceased would have qualified when they died ( i.e. they owned the property for at least two years) and provided also that the executors serve the notice within two years of getting the ‘grant of probate’ to deal with the estate.
Ok, but what if my dream flat is in an auction?
Here the position may be complicated by the fact that you are limited to the ‘standard’ auction terms (completion within 28 days, so this tends to be cash buyers only) and the fact that unless the seller has offered to serve the notice in the ‘special conditions’ set out in the auction pack then you won’t have any legal right to insist that they do serve a notice.
Remember, if you are buying a property at auction then if your bid is accepted, then you are deemed to have exchanged contracts there and then. In other words any investigation and ‘due diligence’ including questions about the lease extension will have to be done up front, before you go to the auction room and bid.
So, assuming I can get the seller to serve a notice what else do I need to know?
Assuming the seller will play ball they best thing to do will be to arrange to have the notice served between exchange and completion. This way the seller does not become bound to start the process until they are committed to sell and you are legally bound to buy the flat from them.
It is also normal for them to ask you to indemnify them against any costs incurred with the landlord in investigating the claim. This is because you would be liable for these if you had served the notice and will be liable for them at completion of the lease extension claim along with some other ‘recoverable’ costs as well.
Where we act for a client who is buying we normally take over the notice serving so as to minimise any risk at this point in he process.
At completion the claim then needs to be properly assigned to you and if this is not done, because of various technical legal reasons the claim will be deemed to be withdrawn.
Will the lease be extended at completion if I do this?
In a word, ‘no.’
An important thing to realise in all of this is that if the lease extension is carried out under statute then the lease will not be extended at the time you complete on your purchase of the flat. If the lease has a shorter lease that is not suitable for lending purposes, then you won’t be able to buy the flat if your mortgage lender needs the lease to be extended at completion.
However, if the current lease length isn’t a problem for your lender, then so much the better, as you probably won’t need to pay for the lease extension until about 6-9 months down the line. This will leave you some time to save up for the further expense.
The only initial outlay (aside from the professional costs) will be a deposit of 10% of the amount out forward as the offer figure in the initial notice of claim.
The need for valuation advice
If you are buying a property with a short lease then you certainly need valuation advice.
This is for two reasons; firstly, if the lease is ‘short’ then you need to know that an appropriate adjustment has been made to the price you are paying to reflect this.
Secondly, in order to start the lease extension process, you will need a valuation report carried out by a surveyor specialising in statutory lease extensions.
The surveyor’s role will be to help give you an idea about some important future costs. Firstly, the likely price that you will end up paying for the lease extension and secondly, the correct ‘offer’ price to put into the notice of claim. If this figure is too low you may risk the claim being held to be invalid – but also there is a risk that you may be paying too much for the flat.
Therefore, you may not want to rely upon any views of the lease extension price provided by the seller or the estate agent. In the first instance, you may find an online lease extension calculator. However, this sort of calculator is no substitute for proper valuation advice.
What if the lease has to be extended at completion so that I can buy the property?
The only way this can work is if it is possible to do a deal with the landlord / freeholder directly. If this happens, then provided that the freeholder will play ball, the lease extension can be granted at completion and even paid for out of the proceeds of sale of the property.
This sounds ideal – so, what’s the catch? There may be none – provided the terms of the deal stack up and it is essential that the price and other terms are looked at closely, ideally by a surveyor.
But, there are two possible issues – one is that the landlord may not want to offer terms that are as generous as those under the statute – (this would give you an additional 90 years – so if the lease is 74 years, this will go back up to 164 years. Also there will be no more ground rent to pay.
Additionally, If the freeholder wants to sell you a lease extension then they may offer a term of 99 or 125 years and may also want to keep a ground rent. Provided that the ground rent is not excessive this will not cause any problems, but there are unfortunate cases where the rent doubles at very short intervals and is ‘high’ to start with which can in fact make the property unsaleable. So you do need specialist advise to check out the terms of any ‘deal’ to make sure that there isn’t a sting in the tail.
Finally, of course, if the property cannot be purchased with out the lease being extended then the freeholder may know this and use this to his advantage in negotiating the terms of any ‘voluntary’ deal.
Mark Chick is a Partner and Head of the Landlord & Tenant team at Bishop & Sewell. To discuss any of the issues raised in this article or leasehold matters generally, please email firstname.lastname@example.org or visit www.bishopandsewell.co.uk.