New lease of life

House key iStock 000004543619XSmall 146x219Jane Reyersbach considers the legal issues that Registered Providers (RPs) should consider when tenants of shared ownership leases request extensions.

Many of the shared ownership schemes began operating around the early 1980s and most provide the tenants with a 99-year lease. Those leases are now reaching the stage where they may be too short for the current leaseholder to assign. This article considers the issues that RPs may face when seeking to extend a shared ownership lease, as well as the legal problems which may be encountered where the RP themselves hold the property on a short headlease.

It is important to note that any shared ownership lease, where the tenant has not staircased to 100%, will fall outside of the provisions of the Leasehold Reform Housing and Urban Development Act 1993, therefore there are no set statutory provisions governing the leasehold extension process. Guidance from the Homes and Communities Agency (HCA) suggests that it is for the RP to decide upon a policy in relation to leasehold extension and on how to allocate the costs associated with that extension.

The 1993 Act

The 1993 Act contains a detailed calculation for working out the amount of a premium to be paid by the leaseholder for a lease extension where the provisions of the Act apply.

RPs may decide to use this calculation as a guideline if they wish to charge a premium for an extension of a shared ownership lease. Obviously the RP may choose to grant the extension without charging a premium or using a different basis for calculation of a premium, if they so choose.

The calculation consists of three parts:

  • loss to the freeholder/head leaseholder of the rent for the remainder of the term;
  • loss to the freeholder/head leaseholder of the reversion, ie the entitlement to the flat at the end of the existing lease; and
  • 50% of the marriage value, ie the increase in value of the property arising from the lease extension. Note that there is no marriage value where the lease has more than 80 years left to run.

A lease extension may initially increase the value of the lease, which may in turn affect the price of any future shares the shared owner may wish to purchase. However, market values can both increase or decrease. The HCA advise that consideration should be given to how any increased share value might affect the revised rent calculation when following the rent formula written into the lease. The advice of a surveyor should always be sought on this point.

Headleases

Where a RP holds a short headlease the extension process may be more complicated as both the headlease and the underlease may need extending. Where the RP as tenant under the headlease has owned the property for more than two years they may ‘qualify’ under the 1993 Act for the automatic statutory renewal of the headlease. The headlease would then be able to be extended in accordance with the statutory regime.

It is technically possible for a headlease to be extended in relation to just one flat and not the entire building. This would obviously be preferable to a shared ownership tenant as the cost of extension may be much reduced. However, there are legal complications associated with extending a headlease of part. Also most freeholders/head leaseholders would not be willing to agree to such a complicated procedure.

It is important for a RP to discuss potential lease extensions with their lender in relation to the property as the RP may have to obtain the consent of the lender to any lease extension.

The HCA guidance suggests that best practice for RPs would be to devise a policy on leasehold extension prior to consenting to the extension in order to ensure equitable treatment amongst all of the tenants of the RP at the relevant development and to avoid the potential for future misunderstanding or complaints.

The HCA encourages RPs to extend their shared ownership leases for the simple reason that any lease, where the term drops below approximately 70 years, will start to decrease in value, causing problems for an occupying tenant on assignment. Indeed most lenders are unlikely to provide a mortgage where the lease term is below 70 years and so buyers of these properties would not be able to obtain funding.

If an RP as tenant has a short headlease in place, it would be wise for a RP to request an extension prior to the remaining number of years left in the term dropping below 80 years, as once the remaining term drops below 80 years, the RP as tenant, will become liable to pay 50% of the marriage value to the freeholder or head leaseholder. This sum may prove to be significant.

Finally, the issue of stamp duty land tax (SDLT) should be considered when allowing any lease extensions as this becomes payable within 30 days of completion of the new lease. Although there are tax reliefs that may be applicable (and many of the shared ownership lease extensions may fall within the nil rate band) the extension of the more valuable headleases may give rise to a significant SDLT liability.

It is important for RPs to consider whether in each particular case the lease referred to falls within the provisions of the 1993 Act as, if they do, it will be possible to follow the statutory process laid out within the Act and associated statutory instruments. If the lease falls outside the Act, a landlord has much more leeway to do as they wish.

Jane Reyersbach is a Solicitor at Charles Russell. She can be contacted on 01483 252515.