Leasehold Reform

Friday, 26th November 2010 | by: Peter Barry

We get quite a few enquiries each week on the subject of Leasehold Reform.  The conversion often starts as follows:- ‘I’m thinking about extending the lease on my flat….can you tell me how much it will cost and how do I go about it?’ After some probing we often find that the enquirer has considered selling their flat and has been told by their estate agent that the unexpired term of their lease is now unacceptably short and that their flat will be difficult to sell unless they extend it.

At first this seems to be a daunting prospect to most flat owners and the legislation covering it seems complex and obscure.  Over the next few months I will try to deal with this subject on the blog post and explain it, hopefully, in layman’s terms without using too much jargon and legalistic terminology, which is not easy when the main piece of legislation covering this issue rejoices in the title of ‘The Leasehold Reform, Housing and Urban Development Act 1993’.  If that isn’t bad enough we also have to add, as amended by the ‘Housing Act 1996 and the Commonhold and Leasehold Reform Act 2002’. We call it the Leasehold Reform Act for simplicity.

First, I will start by dispelling a myth. The legislation does not give a lessee the right to extend their lease. Before you panic, it does give the lessee the right to acquire a new lease in place of the existing lease.  The new lease will be for:-

  • A term expiring 90 years after the termination date of the original lease.
  • At a ‘peppercorn’ (i.e. nominal rent).
  • The remaining lease provisions will generally be the same as the original lease.

In order to obtain the new lease the lessee must pay the freeholder a premium.  The premium is calculated in accordance with the provisions of the Leasehold Reform Act and reflects the Freeholder’s loss of rental income and the loss of the Freeholder’s reversionary interest in the flat at the end of the original lease.  I will explain over the course of the next few blogs exactly how this premium is calculated.

Leases are considered to be ‘short’ when the unexpired term is approaching 80 years.  The reason for this is that the cost of the new lease starts to increase significantly when the unexpired term falls below 80 years and many mortgage lenders will not grant a mortgage until a new lease has been obtained.  I will explain in detail in the next blog the significance of the ‘80 year rule’.

Over the next few blogs I will try to explain fairly simply the procedure for obtaining a new lease and calculating the premium payable by using some fictional cases.  I will start by dealing with who qualifies for a new lease, what types of property qualify and what leases qualify.  I will also try to explain some of the terminology in the Act, such as ‘Reversionary Interest’ and ‘Marriage Value’.

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