Extending short residential leases – The benefit of auction sales

By Shaun Burdett and Hannah Airey

If your property has a short lease (less than 80 years, or fast approaching the point where it will have 80 years or fewer left on the lease term), it is more than likely that you will need to extend your lease at some point in the future in order to be able to sell it on the traditional property market.

It may also be the case that you have been appointed as an executor on behalf of a family member and discovered their property has a short lease.

You will then need to apply and to have it extended before you can sell it, assuming that you have a duty to do so as a trustee or executor.

Your options

If you are facing this kind of situation, there are options available to you.  These are usually:

• Informally – In this case, you would approach your direct landlord (normally the freeholder of the building) and you both agree on a price informally and proceed to extend the lease by agreement.
• Formally – By what is known as the “statutory lease extension route”, pursuant to Section 42 of the Leasehold Reform Housing and Urban Development Act 1993. In these circumstances, the process begins by you serving a formal notice on your landlord. Both the tenant and landlord have a fixed amount of time prescribed by law to come to an agreement regarding the lease premium payable. If a premium cannot be agreed, the matter is referred to the Leasehold Valuation Tribunal who will then determine the valuation.

In either case, once the terms and the price of the extension are decided upon, the formal legal documentation is drafted and put into place.

Nature of the process and stressful complications

The process can be quite complex and long-winded.

If you find yourself in the position of selling a property with a short lease and having to go along the formal route, starting by serving a Section 42 Notice, you are likely to face issues such as:

• Time constraints – Unless you have a cash buyer, you may have to wait until the whole Section 42 “statutory” process is completed. Most High Street lenders are reluctant to offer finance on properties with short leases and therefore a purchaser with a mortgage (or your own bank if you are refinancing) are not likely to commit to the buying or funding as the case may be, until the process has fully concluded. The formal, statutory process can take a number of months.
• Expense – Serving a Section 42 Notice and following the statutory process can be expensive, especially if the lease valuation or extension is contested and referred to the Leasehold Valuation Tribunal. You will need to pay legal and surveyors’ costs associated serving a Section 42 Notice and then for advice during, and to run, the contested process.
• Complexity – Statutory deadlines and the need for excellent project management mean that keeping everything on track and everybody involved in the transaction happy can be tricky.

Cost of the premium

Whether you are following the formal or the informal route, you will of course need to factor in the expense of the cost of the lease term extension itself – you may not have the finances readily available to pay the premiums.  This may be so especially if you are an executor and the estate has limited liquid finances.

Why consider selling at auction?

If you meet the criteria of being able to serve a Section 42 Notice, you may be able to reduce risk in the process by selling the property at auction.

There would still be the need to embark upon the formal route, but, critically, you could transfer the running of the process and leave the obligation to fund the extension and the process with the buyer.

Within the auction special conditions, it is open to you to stipulate that, upon the request of the buyer, you would be prepared to serve a Section 42 Notice to the landlord, normally between the point of ‘fall of the hammer’ and the completion date (which is usually 21 or 28 days after the auction date).

Upon completion, we can assist you with assigning the benefit of the Section 42 Notice which we would have served for you, to the buyer. At that point, the buyer essentially would replace you and, assuming a valid assignment of the notice, the buyer acquires the right to apply to the landlord to extend the lease.

This process benefits you as the seller of a short lease, compared to a traditional sale, in the following ways:

• A shorter sale. Completion can be a few weeks compared to a few months.
• Fewer complications for you as the seller: You do not have to go through the whole process.
• Less costly in terms of the process: You do not have to pay the fees associated with the lease extension (including legal and surveyor’s costs).
• No need to fund the premium for the extension: The premium is paid by the buyer (especially if the estate has limited finances).

We can advise you on lease extensions in the context of sales, remortgaging or equity release, and about auction houses and lease extension surveyors who might be able to help you or if you need assistance with the legal aspects of auction sales.

For further support on property law matters, please do contact a member of our team.