Income from lease extensions

Money iStock 000008683901XSmall 146x219Charles Ward examines the prospect of tenants asking social landlords for an extension to their right-to-buy lease.

At 125 years a typical right-to-buy lease is 26 years longer than the traditional 99-year residential ground-lease. Even those leases granted at the beginning of right-to-buy in the early 1980s still have more than 90 years to run: which is more than enough to satisfy even the most picky mortgage lender.

Yet many local housing authorities and other social landlords are now receiving the first trickle of enquiries from the owners of ex-council properties wanting to extend their leases. This might take the form of a short letter enquiring about the cost of buying a lease-extension: perhaps when the owner is thinking of or in the processes of selling their property.

But this trickle could, within a decade, become a flood as leases shorten and become less attractive to prospective buyers and mortgage lenders. It all provides an opportunity for cash-strapped social landlords to earn a second capital receipt from properties which have already been sold. In some cases that second capital receipt may be worth more than the discounted price at which the flat was originally sold under right-to-buy.

Subject to basic qualifying criteria the Leasehold Reform Housing and Urban Development Act 1993 (as amended) gives residential leaseholders a statutory right to purchase a 90-year lease extension. All that is required is that the original lease was granted for more than 21 years and the applicant has owned that lease for at least two years, whether or not they have actually occupied the property as their home.

The price payable for the lease extension is also fixed according to a statutory formula which is intended to achieve a valuation fair to both landlord and leaseholder. Generally the shorter the existing lease, the more the leaseholder will have to pay to extend it.

The statutory process is initiated by a claim notice served by the leaseholder on the landlord setting out the price and other terms which are being offered by the leaseholder for an additional 90 years on their lease. The landlord then has only two months to serve a counter-notice specifying with which of the tenant’s proposed terms the landlord agrees and with which proposed terms the landlord takes issue. The landlord’s notice must also contain any counter-proposals which the landlord wishes to put forward in relation to terms which are disputed. A landlord which does not formally respond within the statutory two month deadline will be deemed to have accepted the terms offered by the leaseholder for the 90-year extension.

Once terms are agreed the matter will proceed as any other conveyancing transaction. Where terms are not agreed the onus is on the leaseholder to refer the outstanding issues to a leasehold valuation tribunal, failing which the extension claim will lapse and the leaseholder will then be barred from making any further claim within the following twelve months. As well the cost of the lease extension, leaseholders will also be required to reimburse the landlord’s reasonable legal and valuation costs.

The situation is a little more complicated when there is an intermediate landlord standing between the council (as freeholder) and the occupational underlessee who is seeking to extend their lease. It can arise where land has been leased by a council for residential redevelopment. Once the individual flats have been constructed and sold off there will be a tripartite arrangement with the council (as freeholder), the developer (as intermediate landlord) and the occupational underlessee.

Under that scenario the freeholder as ‘competent landlord’ will be serving a counternotice not only on behalf of itself but also on behalf of the intermediate landlord, who will be bound by its terms.

My own practice on receiving correspondence from a leaseholder enquiring about extending their lease is to acknowledge that letter and then refer it straight across to a valuation colleague, who will then approach the leaseholder directly with an ‘asking price’. Once there is informal agreement as to terms, the leaseholder will be advised to contact their own lawyer to issue a statutory claim notice reflecting the terms negotiated. This will enable me to issue a statutory counternotice by way of acceptance and get on with the conveyancing. There is just one final thought.

The opportunity to earn additional capital receipts from ex-council flats will, of course, only apply to those councils which have not transferred their housing stock. It is why any council which is in the process of a large scale voluntary transfer of its housing stock to another social landlord should factor into its calculations the prospective value of future lease extensions.

Charles Ward is Sutton Council’s Principal Lawyer for Property and Contracts and is also the author of Residential Leaseholders Handbook. He can be contacted by This email address is being protected from spambots. You need JavaScript enabled to view it..