Share of Freehold Lease Extension for Short Lease

23/04/2018
Share of freehold lease extension is highly desirable particularly when your lease length is short; by doing so, all share of freeholders increase the value of their own leaseholds.

What is a Short Lease?

A short lease, as the term is commonly used (although not strictly correctly - see below)*, doesn't have a strict definition but it typically means a lease agreement with less than 80 years to run before reversion to the freeholder.

In reality, exactly how long 'short' means in this context is totally down to individual lenders' definitions. They set their own lease time limits and any lease which falls below these is called 'short' which simply means they won't lend on it.

The issue for share of freeholders is that lenders don't take into account the share of freehold when providing finance, just the individual leases, hence the issues which arise when it comes to remortgaging or selling up (if the buyer is seeking to purchase the share of freehold with a mortgage).

*Strictly speaking, a long lease is defined as:

"...a lease, originally for a period of over 21 years, on a whole house of low rent and ratable value, which is the occupants' only or main residence..."

It's called a long lease to differentiate it from a short, rental-type lease, such as a 6-month lease, where you in no sense own the property involved.

The key benefits of a long lease (which is most often just referred to as a 'lease' (rather confusingly!)) over a short lease are that you are entitled, subject to certain criteria to buy the freehold, extend the lease, or become a statutory tenant. 

For the purposes of this article however, we'll regard a short lease as one that was granted originally as a long lease, but where the time remaining on it is such that a lender won't remortgage or grant a mortgage to a prospective buyer to buy the property in question.

In fact it's a relatively simple and normally fairly low cost exercise, but it's well worth doing because if you leave it until you choose to sell up or remortgage, you will feel pressure to complete a lease extension quickly in order to be able to do either. 

Note that you must get permission from the other share of freeholder/s to go ahead; if you cannot obtain this, you have to go through a more complicated statutory procedure which involves court proceedings and having to pay a premium for the extension. If you have set up a limited company to represent the freehold, you should set a formal meeting to discuss your proposal and get approval from the other Director/s. 

This article looks at the following:


Are you a share of freeholder and need a lease extension because of a short lease?

It may be that you're looking to remortgage or wanting to sell up and your lender or prospective buyer expects this and may be pressuring you to move quickly. 

NB You will need the permission of the other share of freeholder/s to extend your lease. If you cannot get this for any reason, please call 0333 344 3234 (local call charges apply) for further advice.

Our experienced share of freehold lease extension solicitors can help you complete your lease extension efficiently and at a reasonable price.

*Fixed Fee – No Sale No Fee – On all Major Lender Panels


    1
    Why should you extend your share of freehold lease?
You should extend your lease as a share of freeholder, particularly if it is short, because:
  • Your individual lease becomes more valuable;
  • You'll be able to remortgage (you can't on a 'short' lease);
  • You make it easier to sell your leasehold if you wish to.
If you have the opportunity to extend your lease now (other share of freeholders consent) you should grab it, because you don't know if, further down the line, should you be required to extend it (say to remortgage), you might be unable to find all the share of freeholders to get agreement or unable to get consent. Either of these will result in a more costly and drawn out process.

Fixed Fee, No Sale No Fee with a 5 out of 5 rating

 

Got a mortgage? Then you'll need your lender's consent for your lease extension

As a general rule of thumb, if you're using or have used a mortgage to buy a home, you'll always need to refer to the lender involved for consent if you want to do anything that affects the property's title, such as extend its lease length or remortgage against it.

You should have no difficulty getting consent for a lease extension in the vast majority of cases however, because you're planning to carry out something which will add value to the asset.

 

    2
    How you can you best prepare yourself to extend your share of freehold lease?

  • You must get the agreement of the other share of freeholders to proceed with the lease extension first otherwise, as stated, you might ultimately have to go through a drawn-out statutory procedure with court proceedings, which is likely to cost far more. This is discussed below.
  • You should also get confirmation from your other share of freeholder/s that you're appointing a solicitor to act on behalf of both freeholder and you yourself as leaseholder (this will save money on legal costs) and that you will be liable for associated costs.
  • Finally, you should confirm whether 999 years is to be the term of the lease extension and whether you will be charged a peppercorn rent.

    3
    Do you need to get a RICS freehold valuation in order to extend your share of freehold lease?
You don't need to get a RICS freehold valuation for your lease extension but you are advised to get one in the rare event that you are required to pay a premium, such that this premium can be worked out as fairly as possible.

You should not have to pay any premium when you lease extend as a share of freeholder

There is no obvious reason why you would get a freehold valuation for a lease extension as a share of freeholder because all you want to do - and most often, the other freeholder/s with you - is extend the lease to 999 years and make or keep the rent 'peppercorn'.

It's true that if you weren't a share of freeholder and wanted to extend your lease, your freeholder would want to get value (the premium) for selling you an enriched asset and thus an expert calculation would be critical. But as a share of freeholder, effectively you'd be paying yourself in part.

Additionally, whatever procedure is agreed for carrying out your share of freeholder lease extension will have to be carried out if anyone else wants to extend their lease in turn: if you're expected to pay a premium then any other share of freeholder will have to in future. Once again, this would be self-defeating, although not technically impossible.

 

    4
    What is the share of freehold lease extension process?
Assuming you have agreement from your other share of freeholders to proceed, you should get an undertaking from your other share of freeholder/s that your solicitor is going to act for you and for the freeholder, thus waiving your right to independence - this saves costs. Your solicitor then proceeds with the required conveyancing.

You would only get a RICS valuation of your freehold before instructing your solicitor if you're expected to pay a premium, but, for reasons explained above, it's highly unlikely that you'd be expected to pay a premium.

You then normally have 2 options regarding the format of the new lease:

Option 1: An entirely new lease is drawn up
This option involves all the terms of all the leases in the building being rewritten. You only normally need to do this if:
  • the current leases are substantially defective in many respects; or
  • the format of the lease differs throughout the building - they should ideally be uniform in all key aspects.
Option 2 A deed of surrender and re-grant is created
Effectively this is a ‘short form’ of a new lease which refers back to the majority of the terms of the existing lease and only amends the length of the term (normally to 999 years) and reduces the rent (normally to a 'peppercorn', i.e. there is no rent payable). Additionally you can choose to incorporate minor amendments to the leases for example you might remove any covenanted restriction against keeping pets in a leasehold or you might want to add a covenant which enables the freeholder to act against breaches of leasehold contract.

The majority of leases are extended in this way.

Your solicitor draws up the new lease (which is then registered) and completes the required conveyancing.

Our experienced solicitors can guide you through this process highly efficiently; call 0333 344 3234 (local call charges apply) if you wish to find out more.

*Fixed Fee – No Sale No Fee – On all Major Lender Panels

Lenders and mortgage deeds

If your leasehold has a mortgage and your lender has consented to your plan to extend your share of freehold lease, in order to comply with the Land Registry's requirements as part of your conveyancing you'll have to sign either:
  • a deed of substituted security – this substitutes the new lease as security for the mortgage, in place of the original lease; or
  • a new mortgage deed – in this case the lender will have to notify the registry on completion that the original mortgage is discharged.

Do you have to pay stamp duty on a lease extension?

Lease extensions are usually exempt from stamp duty because where the surrender of a lease is given in consideration of a new lease being granted between the same parties, neither the surrender of the old lease or the grant of the new lease are regarded as chargeable consideration for the purposes of stamp duty.

You don’t have to tell HMRC or pay stamp duty when you buy a new or assigned lease of 7 years or more, as long as the premium is less than £40,000 and the annual rent is less than £1,000.

You also don't have to inform HMRC or pay stamp duty when you assign or surrender a residential or non-residential lease (granted for 7 years or more) and the chargeable consideration is less than £40,000.

That said, if you are extending a lease on a property which is not your only property and the agreed premium is £40,000 or over, then the 3% stamp duty surcharge will apply: please call our experts for more information on this topic - 0333 344 3234 (local call charges apply).


    5
    How long does a share of freehold lease extension take?
Assuming you have lender consent (if required) and consent from the other share of freeholders, you should be able to extend your lease in a matter of weeks (perhaps 4 - 6 weeks), although this will depend on individual circumstance.


    6
    How much is a share of freehold lease extension likely to cost?
SAM Conveyancing charges £900 for the conveyancing for extending a single lease as part of a share of freehold. This falls to £780 per leasehold title if there is more than one as long as they are all part of the same share of freehold block.

In the rare event that you require a RICS leasehold valuation as well, SAM Conveyancing charges £600 for this service.


    7
    What happens if your other share of freeholders refuse to allow your lease extension?
You then have to take the 'formal' statutory route to lease extension (click to find out more): you can effectively force a freeholder to agree the premium required to grant you a 90 year lease extension with a peppercorn rent.

This is a more expensive process and protracted process for which you are strongly advised to get a RICS freehold valuation and instruct experienced lease extension solicitors. The quicker you can find agreement as a rule in all these matters, the cheaper the outcome will be. The formal process at its most extreme can involve an application to a tribunal, at which point the freeholder must pay their own costs, a further encouragement to settle the matter.


    8
    What happens if you can't locate your other share of freeholder/s for your lease extension?
You have to apply to court for a Vesting Order (click to read our main article on this topic). You will need to make demonstrable efforts to find the absent share of freeholder and there are costs involved as well as time limits to adhere to.

This situation can occur in unexpected ways. There have been many cases where a previous share of freeholder has sold their leasehold interest to someone else but, perhaps inadvertently, has not sold on their share in the freehold interest.

It remains then that legally they must be consulted if someone wants to extend their lease, but they might not be easily found.

The situation can also occur if one of the share of freeholders gets repossessed: the lender has no right to transfer the share of freehold away from them. And people in this position have sometimes been known to be found or appear years later, seeking huge remuneration for the sale of their freehold interest.

Tip: Establish a Limited Company to Run Your Share of Freehold if Feasible

Holding your share of freehold interest collectively in a limited company enables you to place special provisions in the memorandum and articles of association linking the ownership of the freehold automatically to the ownership of the flats.

This can greatly assist you in the future as it enables a Director (which can be any one of the share of freeholders) to transfer a share even if it was not dealt with by an outgoing share of freehold leasehold tenant and so avoid the troublesome situation on resale or repossession referred to above.

If you haven't set this up in your company articles it may well be worth doing so.

The flipside is that, if you form a limited company, you'll have legal requirements to file formal returns and accounts, even if they are dormant, at least once a year, and the penalties for non-compliance are relatively high. If your company is struck off the Company Register and dissolved, it is costly and can be time-consuming to restore it to the register. It also may not make sense in terms of time, costs and returns, to formalise matters in this way if there are just two or three of you sharing a freehold.

It should be clear from this and from other matters above, however, that it's well worth moving the value of the freehold to the leasehold, regardless of whether you run your share of freehold as a company or on an individual basis.

    9
    Appendix 1: Diagram of the formal lease extension process (other share of freeholders don't agree to lease extension)


    10
    Appendix 2: Cost of the formal lease extension process (other share of freeholders don't agree to lease extension)


 
Formal 
Lease Extension
(Estimated costs)

RICS Lease Valuation

£600 Inc VAT

Section 42 notice legal fees

£600 INC VAT

Lease extension legal fees £720
Other costs include:
Stamp Duty
You don’t have to tell HMRC or pay SDLT when
you buy a new or assigned lease of 7 years or more,
as long as the premium is less than £40,000 and the
annual rent is less than £1,000

TBC
Land Registration
Based on the property value.
Read about the land registration charge

TBC
Online Identification (per Person)
Read what ID does your solicitor need

£8
Official Copy of Register & Title Plan (per title)

£6
Official Copy of Lease

£3
Bankruptcy and OS1 priority land registry fee

£10
Registration of the Section 42 notice at the
Land Registry
(formal route only)

£20
Additional solicitor’s legal fee for
Deed of substituted security
(only if mortgage)

£120 INC VAT

Are you a share of freeholder and need a lease extension because of a short lease?

It may be that you're looking to remortgage or wanting to sell up and your lender or prospective buyer expects this and may be pressuring you to move quickly. 

NB You will need the permission of the other share of freeholder/s to extend your lease. If you cannot get this for any reason, please call 0333 344 3234 (local call charges apply) for further advice.

Our experienced share of freehold lease extension solicitors can help you complete your lease extension efficiently and at a reasonable price.

*Fixed Fee – No Sale No Fee – On all Major Lender Panels


Related News Articles

 
Buying a leasehold property with a short lease
18/09/2017
Lease Extension Process
22/07/2018
Lease Extension Valuation
09/01/2018
Share of Freehold
27/09/2017
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