Leasehold extension under the legislation or not?

Hi there,

For the last 3.5 years my partner and I have owned the Leasehold to a 1 bed (Victorian conversion) garden flat in North London. There are approx 72 years remaining on the current Leasehold. We pay £40pa ground rent.

Our freeholder lives above in the top 2 floors of this 3 story property. We have a fantastic relationship with her. She is widowed, and in later years. Prior to her husband's passing, he was looking into the fees/premiums for extending the Leasehold as the previous owner of our flat was keen to do this before selling. The figures that were thrown about were for extending the Leasehold up to 125yrs, for a fee of £5000 (plus the legal costs for arranging). Thus the leasehold extension would be for approx 53years on top of the 72 remaining. I believe also that after accepting her offer we will still be expected to pay the ground rent of at least £40pa for the remainder of the term which would add a further cost of £5000 in total (£40X125yrs), which i guess needs to be taken into account. That would result in a total cost of £10,000 plus legal fees. Are my sums correct?

This offer has been passed on to us, in good faith really, as the freeholder is under the belief that this is a generous offer and one that her late husband was happy with. At first glance it seems fair/generous to us too.

However having since done quite a bit of research on leasehold extensions and enfranchisement i'm now wondering what to do. Under the legislation, it appears that as the freeholder lives in the property (which was once a single dwelling, coverted into 2 dwellings) and only our flat is under leasehold, we do not qualify to buy the freehold to our flat. Is this right? But we could ask for the 'right of first refusal' on buying the entire property's freehold (which would include the freehold to our flat) should the Freeholder decide to sell, or in the event of her passing, her family decide to sell the property...? Am I correct in assuming that the 'right of first refusal' is something that we could get in writing?

That aside, we are left with the option to extend the Leasehold. Under the legislation it appears that as we have owned the flat for more than 2 years, we are entitled to an extension of 90years and a peppercorn ground rent (£0). But on doing this we are also obligated to pay the Freeholder a 50% share in the 'marriage value' of the flat (the rise in value that would occur on the flat if the leasehold is extended by a further 90yrs) plus the current ground rent per year multiplied by the number of years remaining on the term (so £40X72yrs= £2880). Are these figures correct? I'm still trying to ascertain the value of the flat with the leasehold at either 125yrs (as per the freeholders offer) or 162yrs. Last year it was valued at £275,000 with the remaining term of 73yrs leasehold, but obviously the market has dropped some. Would you have any rough estimates as to the increase in value at each remaining term (ie +53yrs and +90yrs)?

And finally, in light of our 'entitlement under the legislation' does the freeholder's offer of extending the leasehold up to 125yrs (adding 53yrs to the current term) for the sum of £5000 plus the legal fees (approx £850) and ongoing ground rent pa seem reasonable or advisable or should we aim for our full entitlement under the legislation? Which do you think would be better value for money?

As mentioned previously, we have a lovely relationship with our freeholder and i dont want to panic her or give formal notice if this can be avoided, but we do want to know we are getting a good deal (that makes sound financial sense) and terms that we are entitled to.

Sorry this is so long!!! I hope you can help.

Yours kindly
Sarah

Hi Sarah,

Thank you for your post.

In answer to your question whether your calculations are correct, most of my previous clients will normally look at figure for the premium alone, rather than add in the total cost of the ongoing ground rent. This is simply because the premium is a one-off cost and the ground rent is an ongoing expense at what some people would class as at a "nominal" level. However, £40 x 125 years I agree amounts to £5,000 in total.

As I am not a qualified surveyor, it is difficult for me to comment with any degree of certainty whether the proposed premium of £5,000 is reasonable. However, from what you have told me in your post, £5,000 seems very reasonable indeed. If you had said the freeholder wanted £15k, I would have said that seemed not far off the mark either, subject of course to my recommendation that you obtain a formal valuation by an experienced and qualified surveyor. Only then can you be 100% sure whether the offer is reasonable or not.

You are correct in stating you cannot buy the freehold of your flat, unless the current freeholder agreed to do so (unlikely).

For a number of reasons, regrettably you do not qualify for the "right of first refusal". First, there needs to be at least two qualifying flats. Here there is only one qualifying flat...yours. Secondly, such right can only be accepted by 51% or more leaseholders. On your own, you only represent 50%. Thirdly, it is likely your freeholder would be under no obligation to serve a formal right of first refusal notice, given the likelihood of her qualifying as a "resident landlord".

In terms of your "rights", you merely have the individual right to extend your lease, if you choose to go down this avenue.

Again, as to your calculations, this is really the job for a qualified surveyor who specializes in this field, but I would not be surprised if the surveyor valued the "statutory" lease extension at about £15k, with a figure of perhaps £2k-£3k less for a 53 year extension.

Personally, if the freeholder is willing to increase the term to 125 years for a premium of £5,000, to me, this is the obvious way forward. I would bite her arm off and get this through as quickly as possible, before she receives proper advice. This will also ensure relations between you remain as they are, rather than risk the potential for a breakdown in the relationship, which a formal claim may encourage.

Forgive me if there is anything else I have not covered, but please let me know if you have any further enquiries.

Kind Regards

Tom