Earls Court Square, Kensington, London SW5

Lease Extension:

The client approached Peter Barry to undertake a lease extension on their property that had 102 years remaining but had a ground rent schedule of £250 per annum that doubled every 25 years, meaning that they faced paying £500 a year in a little over 2 years time. They had made an informal enquiry with the freeholder but at £16,000 (and with a continuation of the ground rent), this seemed excessive for a property that was unlikely to be worth much more than £550,000.

After speaking to one of our chartered surveyors, it was concluded that the best way forward would be to try to agree an informal agreement with the freeholder, but to have a solicitor waiting in the wings to serve a formal S42 notice, should this prove unsuccessful.

The Valuation

With the T&Cs agreed, the surveyor attending the property to undertake his inspection. The property whilst in a fair condition, was dated throughout with the kitchen and bathroom having not been replaced for at least a couple of decades.

Under the Leasehold Reform Act (the Act), it is assumed that the property in question is in what is often referred to as ‘lease maintained condition’. Now the average lease will require the leaseholder to periodically paint and maintain their property, but not go as far as to have them update more substantial elements such as the kitchen or the bathroom. The Act also states that tenant’s (leaseholders) improvements are to be disregarded. That said, a midrange kitchen installed in 1990, would not in be a midrange in 2017 so surveyors are divided as to how to treat such items. Also, a midrange kitchen in Kensington is going to be different to a midrange kitchen in Kennington.

The property was an upper floor flat, reception, kitchen, bathroom and 1 bedroom set over 41 m2 / 441 sq ft. Back at the office, it was determined that the property was worth £540,000, equal to just over £1,200 / sq ft. Better properties of similar size were selling for nearer £600,000 on lower floors and in a better condition, whilst smaller properties that needed work, set over smaller internal areas were in the region of £500,000. The reversion rate of 5% was consistent with the ruling in Sportelli and whilst the ground rent doubled every 25 years, 7% was chosen for the capitalization rate.

 

Negotiations

The aim of informal negotiations is to agree a fair premium that takes into account the likely costs of instructing solicitors to serve a S42 notice. The Act allows the freeholder to recoup their valuation and legal costs, and on an average claim, can come in at anywhere between £5,000 and £10,000 if the case is settled without the need of a Tribunal hearing. This estimate can double if you do go to the Tribunal.

The surveyor wrote to the freehold company to commence negotiations and was introduced to their instructed surveyor. The previous offer of £16,000 plus ground rent was repeated. Following several weeks of negotiations, the agreed premium for a statutory 90 year extension and peppercorn ground rent was £11,250 plus freeholder’s costs of £2,000. Had the client chosen to serve a S42 notice, the best case scenario would have been £9,500 plus £5,000 professional fees.

Conclusion

Extending leases that are above 80 years always presents the client with an opportunity to get an informal extension with much greater certainty than when their lease is below 80 years, but still requires the right professional assistance in order to get there.

The sales pitch to the freeholder’s surveyor in this case was relativity simple, in that his client would probably achieve less should he force the client down the S42 notice route. If an extension is agreed informally, the only real losers are the surveyors and solicitors involved in the S42 process, and the difference in the professional fees is split between the leaseholder and the freeholder.

This is just one example of the work Peter Barry do on a day to day basis and our surveyors draw on a wide range of experience in any given scenario. If have a leasehold property and are looking to extend your lease (or join collectively and buy the freehold), please don’t hesitate to contact our Kensington Head Office on 020 7183 2578 or email surveying@peterbarry.co.uk . Alternatively feel free to come to our office located at 58-60 Kensington Church and one of our surveyors will gladly assist you.