Flat Leases - Time to Extend?

To most flat owners, the content and meaning of the lease for their flat is quite mysterious. This is understandable, we lead busy lives and, frankly, that the lease might prohibit the playing of gramophone records after 10 p.m. or require the landlord to insure against damage caused by objects falling from aeroplanes (except in time of war!) is neither here nor there.

And yet, the content and meaning of the lease is vitally important. It is a rule book governing the relationship between the landlord and the flat owner, but more fundamentally it limits this relationship by reference to time. When time runs out, ownership expires. The natural consequence is that with the passage of time, the value of a flat will decrease, imperceptibly at first, but eventually, quite dramatically.

It is important to be aware of this inevitable function of a lease in order to consider at what point it might be best to extend.

Thankfully, flat owners have had an innate statutory right to extend their leases since 1993 (although perhaps it is surprising that such a right did not exist before this date). Subject to having owned the flat for more than 2 years, a flat owner may make a claim to extend by an additional 90 years with the obligation to pay ground rent removed. In return they must pay to the landlord a purchase price calculated by reference to a set method of valuation. If the parties cannot agree then the purchase price can be adjudicated on.

With that statutory right as a fall-back position it is common for flat owners and landlords to agree terms outside of the statutory framework, for example an extension back to, say, 99 years with an increase in ground rent in exchange for a purchase price that is lower than would be payable for a statutory extension.

As to which option is best, this will depend on the circumstances of the parties. For example, it might be better for a flat owner who wishes to sell to agree something less than a statutory lease extension because the purchase price will be lower but the flat will still achieve the same sale price on the open market than if it had a longer (but more expensive) statutory lease extension. Conversely, it might be that the freeholder is only prepared to agree a shorter extension, possibly with increased ground rent, in circumstances where the flat owner intends to own the flat for many years to come. In those circumstance the better option for the flat owner is likely to be to start a statutory claim to force the landlord to grant a 90 year extension and remove the obligation to pay ground rent.

In all cases it is worth remembering that because the length of the lease decreases inexorably the cost of extending will only ever increase. Whatever the circumstances of the flat owner, it will always be worth considering whether now is the right time to extend the lease and thereby, protect the value of their flat.

Dan Ongley, LLP Partner, Griffith Smith Farrington Webb  |  03/09/2014

If you want to contribute to the Chamber blog, contact us on hannah@brightonchamber.co.uk