As you are most likely aware by now, the topics involving leasehold reform valuation are complex and detailed. The various Acts and procedures along with individual circumstances and the specifics of each interest all need to be known and understood. As such, whilst the following questions and answers try to cover the most popular questions to help with understanding, please do not hesitate to contact us if you have further questions and note this list is by no means exhaustive with each valuation to be approached on the relevant facts and circumstances.

1) What is a lease / leasehold property?

A lease is a right to use the property for a period of time.

As a lease gets shorter the interest returns more in favour of the freeholder, especially when a lease drops below 80 years remaining. As such, when a leaseholder seeks to extend a lease, the premium gets more expensive, in real terms, the shorter the lease becomes.

2) Why would a leaseholder seek a lease extension?
  • Safeguard the value of their interest in the property from the effect of a shortening lease
  • Make it easier to sell the property now or in the future
  • Make it easier to mortgage or remortgage the property
  • Safeguard the value to pass on to the next generation
3) Why would leaseholders seek to buy the freehold?

This is usually because they wish to have control of the building. It is common for (some of) the leases to be at a length where they also need extending, and therefore cost-effective for the leaseholders to achieve this under a Collective Enfranchisement claim whereby this aspect is covered as part of the compensation / purchase price for the freehold.  

4) I wish to sell the freehold. What should I do?

Seek professional valuation and legal advice.

5) Do I have to grant a lease extension or agree to sell the freehold?

The Leasehold Reform Housing and Urban Development Act 1993 - as amended (“the Act”) stipulates qualifications which must be met in order for the leaseholder(s) to be entitled to a statutory lease extension or buying the freehold. Provided these are met and the legal procedures are fulfilled, the claims cannot be refused, subject to appropriate consideration being paid.

6) How do leaseholders qualify to be able to extend a lease inside the Act?
  •  The leaseholder has to have owned their property for at least two years;
  •  The original lease has to be for a period in excess of 21 years. 

Provided the above criteria are met, any flat owner can extend their lease inside the Act, provided:-

  • The freeholder is not the Crown Estate, The National Trust or a charitable housing trust;
  • 100% of the property is owned. 

This said, freeholders can still grant lease extensions outside the Act (often on more favourable terms) irrespective of whether the criteria are met for a statutory lease extension.

7) How do leaseholders qualify to be able to buy the freehold inside the Act?
  • They must have qualifying leases on the property (albeit there is no two year minimum ownership requirement, unlike a lease extension claim);
  • They need 50% or more of the leaseholders in the building to participate*. If there are only two flats in the building, both must participate. 

There are also a number of requirements the building must meet in order to qualify inside the Act, which should be discussed with your professional advisers. 

*N.B. If selling the freehold via Right of First Refusal, a majority is required, i.e. over 50% of the leaseholders in the building participating.

8) What is a statutory lease extension?

Provided the appropriate qualifications are met (see Question 6), a leaseholder is entitled to seek a lease extension on statutory terms, which are as follows:

  • An extension of 90 years onto the existing term;
  • A peppercorn (i.e. nil) ground rent.
9) Can freeholders grant a lease extension / sell the freehold outside the Act.

Yes. The basis, terms and agreement on price payable is at the discretion of the freeholder, albeit for leaseholders who qualify to make a claim inside the Act (and also well advised), significant deviations will most likely result in a formal claim being made and therefore controlled by the legislation. 

10) What is a premium / purchase price?

It is the compensation paid to the freeholder to the loss incurred for granting a new lease or the loss of the freehold investment. Essentially the calculations account for changes in / loss of ground rent income and the fact that the property will not be returning to him/her for an extended period of time, or at all (in the case of buying the freehold). There is further compensation for any loss arising from the grant of an extended lease or selling the freehold (e.g. loss of development potential) and the freeholder’s share of the Marriage Value, if appropriate.

11) When selling the freehold do flats of those who do not participate get included in the purchase price?

Yes. The purchase price includes all the leasehold interests and the participants have to pay for the non-participants. 

This said, the legislation for Collective Enfranchisement claims stipulates that if the flats of non-participants are under 80 years remaining the full amount of the share of Marriage Value is not included in the purchase price.

12) Do leaseholder (tenant) improvements get taken into account for the premium / purchase price?

The legislation stipulates that tenant leaseholder improvements made to the property are not included in the calculation of the premium for a lease extension and for the properties of the participants in a Collective Enfranchisement claim. This said, what improvements count as tenant leaseholder improvements under the technicalities of the legislation are for the valuer to advise, which is one of the main reasons why it is important to inspect the property / properties when undertaking a valuation.

13) How much is the premium to extend my lease likely to be?

It is not possible to say without knowing the specific details of the property and the lease. As an initial guide for budgeting purposes you should go to the Lease Extension Calculator on the Lease Advisory Service website (see ‘Useful Links’), taking note of the disclaimer on the introduction page.

14) What costs do I have to pay?

If the lease extension or Collective Enfranchisement claim is made inside the Act (Formal route), the legislation stipulates the leaseholder(s) is/are responsible for the payment of both leaseholder professional fees and the “reasonable” professional fees incurred by the freeholder. Essentially the freeholder’s costs are covered with the exception of fees incurred for negotiations or taking a claim to Tribunal. The Act also covers for the freeholder’s reasonable fees to be paid if the leaseholder(s) withdraw(s). 

N.B. If selling the freehold via Right of First Refusal, the freeholder is to pay for their own fees out of the proceeds of the sale.

15) What is the process when extending a lease or buying the freehold inside the Act?

The qualifying leaseholder(s) serve(s) an Initial Notice (what is known as a Section 42 Notice for a lease extension claim or Section 13 Notice for a Collective Enfranchisement claim) on the freeholder, in which the premium / purchase price being offered is stated. 

Ahead of a specified deadline in the Initial Notice (around two months from the Notice being served) the freeholder must issue a Counter Notice (which is known as a Section 45 / 21 Notice, respectively) acknowledging the claim and stating any disagreements, usually in respect of the amount offered. A counter offer is usually made, as advised by your valuer. 

From the date of the Counter Notice the parties have a total of six months to negotiate the premium / purchase price and any updating of lease terms (potentially relevant in lease extension claims). After the first two months application can be made to the Tribunal for a determination, but after the six months the right to apply to Tribunal is lost. Please click on ‘The Process’ tab for flow chart.

16) How long can it take?

A claim made inside the Act (Formal route): - From the serving of the Initial Notice, the process can take 8-10 months, but if the matter is referred to Tribunal for determination this can be over a year by the time a determination is given. 

If leaseholders look to proceed outside the Act (Informal route): - This can vary hugely, literally from days to months etc. depending on how speedily the parties act and how soon the proceedings are taken inside the Act should negotiations fail, if possible.

17) Is it likely that the matter will have to be determined by the First-tier Tribunal (Property Chamber) (“Tribunal”)?

No. In reality very few proceed to Tribunal. Overall costs of seeking a determination via Tribunal need to be considered in the context of the amounts being argued for the lease extension premium or purchase price for the freehold. 

This said, there is a higher chance for a Collective Enfranchisement claim to proceed to Tribunal given the amounts of money involved and the fact the leaseholders can divide their professional costs between them.

18) How much does it cost for determination by the First-tier Tribunal (Property Chamber) (“Tribunal”)?

It can vary, but a general guide would be circa £5,000, depending on the nature of the claim and the issues involved. Each party is responsible for their own legal and valuation costs.

19) Why is 80 years so significant?

Despite a leasehold interest being a wasting asset, the legislation is such that 80 years is taken as the threshold where marriage value is to be included in the amount payable to the freeholder. This is the increase in value between the property with the existing lease versus the value with an extended lease, split and shared 50:50 with the freeholder.