Freeholder Extended Lease for Free - How do they benefit?

Ared

Hi, I recently brought a flat and it turns out that the freeholder extended our leases by 50 years, bring the the lease up to 136 years each for free. Is there a hidden benefit for the freeholder? Should I be dubious about this? Currently we pay peppercorn and no management fees, all the lease holders are to left to fix any problems between ourshelves.

eddddy

The usual 'trick' is to substantially increase the ground rent - e.g. from £1 per year to £300 per year and escalating - in return for a free lease extension.

When you say the ground rent is 'peppercorn' - are you looking at the original lease, or the Deed of Variation that grants the extra 50 years?  The Deed of Variation would also state any new ground rent.

Does the Deed of Variation mention any other new terms? i.e. Are there any new terms that benefit the freeholder in return for the free lease extension?

princeofpounds

Could the freeholder be a connected party to the previous leaseholder? Or even the same person, possibly with share of freehold?

Or they simply may not care that much and see waving through things like this as an informal quid pro quo for not having to do any genuine freeholder work. 

It's unusual, but you see all sorts of odd arrangements over time.

NameUnavailable

Often an informal lease extension will be given with some changes to the terms of the lease, most commonly an increase in ground rent - be careful, as onerous ground rent terms could make your flat very difficult to sell on again!

Ared

Thanks everyone, it’s really strange the only change that came about was the ground rent £50 changed it to peppercorn. The peppercorn is actually nothing at all! It’s almost to good to be true. I am waiting for the catch! The freeholder is a large property company who won hundreds of buildings in London.

anselld

Ared said:

Thanks everyone, it’s really strange the only change that came about was the ground rent £50 changed it to peppercorn. The peppercorn is actually nothing at all! It’s almost to good to be true. I am waiting for the catch! The freeholder is a large property company who won hundreds of buildings in London.

If they won hundreds of buildings no wonder they are giving away free extensions.

Slithery

Ared said:

The peppercorn is actually nothing at all!

No, it means an actual peppercorn. But you can buy a few centuries supply for under £2...
https://www.amazon.co.uk/TRS-Whole-Black-Pepper-Peppercorns/dp/B003XB2RPE

peterhjohnson

I wonder if the large property company just doesn't want the hassle of collecting £50/year?  May be really fiddly small change to them.

eddddy

peterhjohnson said:

I wonder if the large property company just doesn't want the hassle of collecting £50/year?  May be really fiddly small change to them.

Well... in that case, they just wouldn't collect it. Or maybe only send a bill every 6 years for £300. (And why add 50 years to the lease?)

And reducing the ground rent and extending the leases reduces the value of their freeholds - if/when they sell the freeholds, they will get less money for them. Why would the freeholder do that?

And the lease variations would have involved the freeholder contacting every leaseholder to propose and agree terms. Plus the freeholder paying their legal teams to read each lease; draft a lease variation; get it agreed by the leaseholder, the leaseholder's solicitor, and the leaseholder's mortgage lender. There's significant costs involved in this kind of thing.

I'd be pretty sure that there's a key piece of information that the OP hasn't uncovered yet.