Lease Extensions – Are Registered Providers Making The Most Of Them?

Overview

When it comes to lease extensions, it may be easy to think that these are something solely initiated by leaseholders who are savvy enough to know the details of their leases and the affects these have on them, potential buyers, and lenders. However, this does not always have to be the case. For Registered Providers (RPs), lease extensions can offer a lucrative opportunity to release further capital on their existing stock at very little outlay.

Until recently, the majority of leases granted by RPs will have either been for a 99 or 125 year term. Most lenders will not lend on a lease with less than 80 years left on the term. With this in mind, it doesn’t take long before this term becomes unmortgageable. This creates a bottleneck when a leaseholder attempts to sell their property. They will be notified by the buyer’s lender that the term is too short and requires an extension. In these instances, leaseholders are left with their sale in limbo and suddenly under pressure to enact a lease extension.

What can RPs do to help leaseholders?

In the first instance, RPs may wish to look at their existing leasehold stock and assess sites with properties in need of an extension or approaching the 80 year term. From here, a relatively quick mail shot to the properties in question explaining the benefits of obtaining a lease extension and the process to follow. This in turn may open the door to more leaseholders wanting to pursue this avenue.

RPs could incorporate this information with the rent review paperwork as a side note to their leaseholders, making them aware of the options available to them. It can highlight the importance to a leaseholder of knowing what the term represents and how to access a copy of their lease or title should they need to know how long is left to run on their term.

RPs then benefit from the additional revenue stream, while leaseholders gain a more desirable lease term. This ensures the leaseholders don’t have to worry about delays when selling their property, which may come about if an extension is required.

With fluctuations in the property market and uncertainties over interest rates with lenders, more and more leaseholders are wanting/needing to sell their leasehold properties. Unfortunately, they are being caught out by the need to have their lease extended as part of this process. By actively advertising the availability of lease extensions to leaseholders, RPs can at least encourage them to think about what they own and gain a premium which they can reinvest in other projects such as retrofit.

What is happening with the leasehold reform changes?

There is no specific update as to when the leasehold reform provisions for lease extensions will be introduced as yet. Some of the proposed changes include:

• Reform the process of enfranchisement valuation used to calculate the cost of extending a lease;
• Abolish marriage value;
• Retain the separate valuation methodology for low-value properties; and
• Give leaseholders of flats and houses the same right to extend their lease agreements at zero ground rent for a term of 990 years.

Although these changes are yet to come into force, RPs should use this time to start considering how their processes will change for voluntary lease extensions when the legislation comes into force.

How can lease extensions be used to vary existing leases?

One useful aspect of lease extensions, which does not often get utilised, is the ability to vary the existing terms of the lease. As part of the Section 42 Notice, which can be served on the landlord for a statutory extension, the leaseholder can request variations to the terms of the lease.

It is worth noting that such variations can also be considered on voluntary extensions. RPs may wish to utilise this to update or insert clauses that may be out of date or no longer compliant to lenders.

It is also important to remember that leaseholders will have different options based on the lease they hold and the percentage they own. Therefore, being able to provide them with clear and concise information can help reduce delays and minimise the likelihood of complaints.

As well as advising and assisting on lease extensions the team can provide guidance and training on how best to approach lease holders and the options available to them.