89yrs left on lease - owner offering to extend it. Catch?

Oasis1

There's 89 years left on lease of flat I want to buy. £230 per year ground rent. I’m not comfortable with that - too close to danger zone of 80 - and would want it extended ASAP. I’ve looked into doing it myself via statuatory route and costs could be high given I don’t know the terms of the lease. A solicitor said it could have clauses that escalate the rent, so any premium paid to the freeholder to extend the lease would need to compensate them for that lack of income = potentially v spenny. And that's in addition to paying for my own valuation and solicitor fees, AND the freeholder's.

Owner has now said they spoke to freeholder - they have a figure - and would pay to extend the lease to 125 years. So I could make an offer that’s subject to this happening.

But I’m concerned about the terms of the lease extension. Dodgy ground rent increases, weird charges for things etc. And if it’s not via the statutory route (aka serving a section 42 notice) then you don’t get the mandatory 90 year extension not the mandatory re-setting of the ground rent set to zero. Obviously the owner is also going to want to keep the cost down of this extension, and won’t care that much about the terms because these will be inherited by the new owner. So whilst it’s great they’re willing to do the paperwork, they’re not going to do it in my interests. I'm worried about the detail.

So my question is - is anyone familiar with how this would work in practice? How would I get a solicitor involved with the current owner’s and the freeholder’s in order to make sure the new lease is in my favour? What order does this happen in, given everything else that would need doing (mortgage application, survey, conveyancing etc) And how are the different parties protected? How liable am I for the owner’s costs if I walk away from the sale if the lease extension terms are onerous?

Thanks I’m advance! Feels like such a tricky situation. I hope I’m just missing something simple in how it would all work!

eddddy

Oasis1 said:

A solicitor said it could have clauses that escalate the rent, so any premium paid to the freeholder to extend the lease would need to compensate them for that lack of income = potentially v spenny. And that's in addition to paying for my own valuation and solicitor fees, AND the freeholder's.

Well... a solicitor could also say "if the roof falls off the building, it could be very expensive to repair".

It's a completely true statement, but it's completely hypothetical at this stage.

And if there is an escalating ground rent, it's definitely not a reason to automatically opt for an informal lease extension to 125 years.


Whatever your plans, you need to find out about the ground rent and any ground rent escalation, because...

• A high escalating ground rent might make a property less desirable (so less valuable, and harder to re-sell)

• A fast escalating ground rent might make the property unmortgageable

• An escalating ground rent will make a statutory lease extension more expensive

• An escalating ground rent will make an informal lease extension to 125 years more expensive

Perhaps a starting point would be to get....

• A valuation for a statutory lease extension (bearing in mind that you'll also have to pay fees of £3k to £5k)

• Details of any offer from the freeholder for an informal lease extension to 125 years (including details of fees)

Then compare the 2 options. You might want to ask your valuer to compare them as well.

If you opt for an informal lease extension to 125 years, the freeholder's solicitor will draft new terms for the lease. You can ask your solicitor to check the draft terms before they are signed, to see if there's anything that your solicitor wants to object to.

NameUnavailable

A statutory lease extension will reduce the ground rent to peppercorn and add 90 years to the lease. The vendor could start the process and you would take over when you complete (to avoid having to wait 2 years otherwise).

The new 125 year lease will most likely include higher ground rent and as noted escalating ground rents will make it difficult for you to sell in the future (or might even mean that your lender won't lend now).

The devil is in the detail - ask the vendor for the exact details of the lease extension now. I'd also get a copy of the existing lease to read through and check the current ground rent clause if you don't know it already.

Tracet74

I work with a company who specialises in lease extensions and at the moment we are not recommending the non-statutory path is taken.

In order to proceed down the statutory path, the seller will have to assign the Section 42 notice to you as part of the sale, which will then allow you to proceed.  Alternatively, you could wait until you have been the registered owner for two years before starting the process as you will still be in excess of the 80 year old threshold.

Hope this helps!

eddddy

Tracet74 said:

I work with a company who specialises in lease extensions and at the moment we are not recommending the non-statutory path is taken.

Why are you recommending that at the moment?

If a leaseholder can negotiate a good deal with the freeholder, why shouldn't they take it?  It can usually be done much quicker, and the fees will probably be lower, and you can be more certain about the cost at the outset.  (But you need to be wary of 'dirty tricks' by the freeholder.)

Obviously, if the leaseholder can't negotiate a good deal, they can go for a statutory extension instead.


Presumably you're recommendation isn't just because your company would get more fees from a statutory lease extension?

Oasis1

Thanks all for the advice. I think I'm going to put on offer in, subject to the owner extending the lease and the terms not being onerous. I'll state a preference for the statutory route, and see what they come back with.

Tracet74

eddddy said:

Tracet74 said:

I work with a company who specialises in lease extensions and at the moment we are not recommending the non-statutory path is taken.

Why are you recommending that at the moment?

If a leaseholder can negotiate a good deal with the freeholder, why shouldn't they take it?  It can usually be done much quicker, and the fees will probably be lower, and you can be more certain about the cost at the outset.  (But you need to be wary of 'dirty tricks' by the freeholder.)

Obviously, if the leaseholder can't negotiate a good deal, they can go for a statutory extension instead.


Presumably you're recommendation isn't just because your company would get more fees from a statutory lease extension?

Fees have nothing to do with it as we're always acting in our clients' best interest.

Firstly, going down the non-statutory path means no deadlines are put into place so the freeholder could potentially drag their heels.  

Also, I heard a conversation about how it could split the housing market having flats with a peppercorn ground rent, whether by being a new lease or having been extended, versus an identical flat WITH a ground rent, potentially thousands in London.  Would you rather get the same property with a peppercorn or a ground rent??

diystarter7

I've never understood why 125 years and not 999 years.

powerful_Rogue

diystarter7 said:

I've never understood why 125 years and not 999 years.

££££££         

diystarter7

powerful_Rogue said:

diystarter7 said:

I've never understood why 125 years and not 999 years.

££££££         

Silly me as I posted this and moved on, I thought it was that, thanks.

zagubov

diystarter7 said:

I've never understood why 125 years and not 999 years.

It's longer than a lifetime. 999 years would be longer than a dynasty.