Extending your lease - What's the difference between a non-statutory and statutory procedure?

Why should I extend my lease?

If you are selling a property with an unexpired lease term of less than 80 years, a potential buyer is likely to insist that you extend the lease on, or before, completion.

When a lease drops below 80 years the cost of extending it increases dramatically. This is because the landlord is entitled to additional compensation, known as “marriage value”.

Niki Adkins is a specialist in residential leasehold extensions, lease assignments, lease renewals and buying the freehold of flats and apartments. She has vast experience of all types of lease extensions and freehold purchases. Due to her expertise in this area, she doesn’t deal with any other type of conveyancing.

A lease extension when selling a flat

Niki says “A frequent reason for people coming to see us about extending a lease is when the owners wish to sell the property, either in the immediate future or they are thinking of doing so in the next couple of years. Many mortgage lenders are reluctant to lend against a flat with a short lease, so trying to sell a flat with a short lease dramatically reduces your potential buyers to those who can purchase without a mortgage.”

What is the difference between a non-statutory and statutory procedure?

Statutory Procedure

If you have owned the property for two years then you are entitled to serve a statutory notice on the landlord forcing them to grant you an extension of your existing lease. You would acquire an additional 90 years and your ground rent would be reduced to a peppercorn (i.e. zero) and your notice will contain an offer figure for the lease extension.

The landlord will usually serve a counter-notice counter-proposing a higher figure for the lease extension. At that point your appointed valuer would go into negotiation with the landlord’s valuer in order to reach an agreed figure. There is a period of six months in which terms can be agreed. If an agreement cannot be reached, you would have to apply to the First-tier Tribunal for a determination as to the premium and the terms of the new lease.

Key points of a statutory extension

  • The terms are fixed i.e. an additional 90 years at a peppercorn ground rent – therefore, the landlord cannot offer you unfavourable terms;
  • If the price payable for your lease extension cannot be agreed with the landlord, you can apply to the First-tier Tribunal for a determination of the fair price payable;
  • The landlord is forced to complete and cannot withdraw;
  • There is a strict timetable applicable to Statutory lease extensions resulting in the transactions taking 6-9 months, sometimes longer.

Non-statutory Procedure

Also known as an ‘informal’, ‘open market’, ‘private’, ‘voluntary’ or ‘by agreement’ lease extension.

The non-statutory procedure means that you simply agree terms with your landlord ‘up-front’; usually subject to your landlord obtaining valuation advice at your cost. You don’t need to serve a statutory notice and unlike the statutory route, the terms of the lease extension agreement are not fixed at an additional 90 years and a peppercorn ground rent.

The advantages include reduced costs and timescales. It also allows you to negotiate a short lease extension enabling a sale or re-mortgage to proceed at the same time.

A disadvantage is that all terms are subject to negotiation so a landlord could propose unfavourable terms such as unfair ground rent review provisions and increasing the existing notice fees and interest rates payable under the existing lease. Further, the landlord is not legally obliged to complete the lease extension so you would be relying on your landlord’s good-will.

Ground rent risks

For a number of years, there has been a trend of landlords granting non-statutory lease extensions with increasing ground rents. Such increasing ground rents may not be acceptable to mortgage lenders; both yours and lenders for any future purchaser of your property.

As a result, if your landlord proposes such an increasing ground rent in your lease extension transaction, our advice would be that you seriously consider the possible affect it could have on the future saleability of your property. Further, your lender (if any) will specifically need to approve the same.

If you receive an offer of a non-statutory lease extension from a landlord you should consult a specialist valuer and ask if the proposed terms are reasonable and also take independent legal advice.

Key points of a non-statutory extension

  • The landlord could offer unfavourable terms as they are not fixed, which could affect the saleability of your property;
  • There is no assistance from the First-tier Tribunal;
  • The landlord could withdraw from the transaction at any time before completion;
  • The costs and timescales involved are less than a statutory extension.

What other costs do I need to consider?

You will not only be responsible for your own legal (and possibly valuation) fees, but you will also be responsible for your landlord’s professional advisor’s fees too.

Our Lease Extension specialists, based in Christchurch, also cover Bournemouth, Poole, the New Forest and anywhere else in the country. You can read more and download information from our lease extension pages. If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 and Niki or a member of the Residential Leasehold Property team, will be happy to chat about your situation and your particular requirements.