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The right to an extended lease – flats

A tenant who holds a long lease of a flat has a statutory right (subject to compliance with statutory qualifying criteria) to a 90 year extension of the lease, for which the tenant must pay a premium. The tenant may exercise the right even though the flat forms only part of the premises let by the existing lease.
Although the right is expressed as the tenant being granted an extended lease, the actual method for giving effect to this right is for the tenant to be granted a new lease, in substitution for the existing lease, for a term equal to the unexpired residue of the existing lease plus 90 years.
The right to an extended lease may be exercised repeatedly.
The right to an extended lease may also be exercised by the personal representatives of a deceased qualifying tenant who had not exercised the right prior to his/her death, provided that they give notice to exercise the right within two years of the grant of probate or letters of administration. The procedure for obtaining an extended lease can then be pursued either by the personal representatives or by anyone else to whom the lease is transferred.
Premium payable
The premium for the extended lease comprises:

  • lost ground rent – the capitalised value of the ground rents which would have been paid to the landlord had the existing lease continued,
  • diminution in open market value – usually (unless the unexpired term of the lease was already very long) the open market value of the reversion in the flat decreases as a result of the grant of the lease extension,
  • compensation for severance – any reduction in the value of other property belonging to the landlord which is caused by the lease extension.

In addition, where the unexpired residue of the existing lease is 80 years or less, at the date of the tenant’s notice requesting an extended lease, the tenant must also pay half of the marriage value arising from the lease extension. Marriage value is a valuation concept which recognises the fact that, in contrast to the (likely) fall in the capital value of the reversion interest, the capital value of the lease will rise as a result of the extension, usually by more than the corresponding fall in the value of the reversion. Where the total value of the landlord’s and tenant’s interests after the lease extension is greater than the total value of those interests before the lease extension, the difference is known as the marriage value.
Qualifying criteria
The right to an extended lease arises where:

  • the tenant has owned the leasehold interest in the flat for at least two years before service of the notice requesting an extended lease,
  • the flat is held on a long lease,
  • the rent is a low rent.

Residence in the relevant flat is no longer a pre-condition to the right to an extended lease, following amendments made by Commonhold and Leasehold Reform Act 2002. This means that it is entirely possible that there might be two or more tenants who hold a leasehold interest in relation to a flat which prima facie qualifies them both to call for an extended lease. Where a flat is held under two or more qualifying leases, the right to an extended lease lies with the tenant under the most inferior lease (favouring the tenant who is, or is closest to being, the occupational tenant). 
Where a lease is held in joint names, the joint tenants are regarded as a single tenant for the purposes of the right to acquire an extended lease.
What is a long lease?
A long lease is one:

  • granted for a term of more than 21 years, regardless of any right to forfeit, break etc,
  • granted for a shorter term but with a right for perpetual renewal,
  • terminable on death, marriage or civil partnership (ie a lease taking effect under Law of Property Act 1925, s 149(6)), although there are special rules for determining whether in any particular case such a lease meets the definition of a long tenancy,
  • terminable on an unknown date (ie a lease containing a so-called Prince of Wales clause),
  • granted under the right to buy provisions (Housing Act 1985, Part V) or pursuant to the (now abolished) right to acquire on rent-to-mortgage terms,
  • a shared ownership lease and the tenant’s share is 100 per cent,
  • granted pursuant to the right to buy which is enjoyed by certain tenants of registered social landlords.

The definition provides that where there are two or more leases with the same landlord and tenant and the demise of one consists of the flat or part of it (with or without appurtenant property) and the demise in every other lease consists of either a part of the flat (with or without appurtenant property) or appurtenant property only, there is deemed to be a single lease. Appurtenant property includes any garage, outhouse, garden, yard or appurtenance belonging to or usually enjoyed with the flat.
Terms of the new lease
The extended lease must be granted for a peppercorn rent and on broadly the same terms as the existing lease. Variations are permissible to reflect changes in circumstances since the grant of the existing lease, eg alterations to the flat or to the building, subsequent collateral agreements, and any of the matters referred to in s 57 of the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993), as well as the insertion of a clause giving the landlord the right to repossess the flat for the purposes of redevelopment in accordance with s 61 of LRHUDA 1993 (this right cannot be exercised before the end of the term of the existing lease and is subject to a court application and the payment of full compensation by the landlord to the tenant for the full value of the extended lease).
There is no power under the legislation to add an entirely new provision in the new lease which is not in the original lease. The power conferred by statute is only to exclude or modify a term of the existing lease. A lease can only properly be described as containing a defect (in the sense of a shortcoming, fault, flaw or, perhaps even, imperfection) if it can objectively be said to contain such a defect when reasonably viewed from the stand point of both a reasonable landlord and a reasonable tenant.
If the terms of the extended lease cannot be agreed, either party can apply for them to be settled by a leasehold valuation tribunal in Wales or the First-tier Tribunal (Property Chamber) in England.
Leases which cannot be extended
It is not possible to extend a lease of a flat where:

  • the flat has been let by a charitable housing trust for the purposes of its charitable functions,
  • the lease is a Landlord and Tenant Act 1954 protected business tenancy,
  • the property is held by the Crown, although the Crown has undertaken to allow enfranchisement on the same terms as LRA 1967 unless the land is within an excepted area, in which case a lease extension will usually be granted–see the Crown Estate policy and guidance papers for further information,
  • the property is vested inalienably in the National Trust,
  • the property is within the precinct of a cathedral church.

Landlord’s opposition
The landlord may oppose the tenant’s request for an extended lease on the grounds that:

  • the tenant does not meet one or more of the qualifying criteria set out above, or
  • the tenant’s lease is due to expire within five years and the landlord intends, once the lease has been terminated, to redevelop ‘any premises in which the [tenant’s] flat is contained’ and cannot reasonably do so without obtaining possession of the flat; for this purpose the premises must be an objectively recognisable building or part of a building.

Any dispute as to the landlord’s right to oppose a lease extension is determinable by the county court.
Contracting-out
It is not possible to contract out of the right to a lease extension under LRHUDA 1993, nor may any term or condition be imposed which prevents or restricts the tenant from exercising its rights under LRHUDA 1993. However, this prohibition does not preclude the tenant from surrendering his lease at any time, nor does it preclude him from abandoning his claim to an extended lease after initiating the statutory procedure.
Protection by registration
Once the tenant has given notice to the landlord requesting a lease extension, the flat can be sold with the benefit of the right to an extended lease. In order to ensure that the exercise of the right binds the landlord’s successors in title, you should register the notice against the landlord either by way of a notice (registered land) or by way of a land charge (unregistered land).
For further information:-
Landlords please contact Tom Warrender.  Tenants please contact Jennifer Woodruff.