No easy answers as to this one I’m afraid – the answer is, as always ‘it depends’ and ‘advice follows the facts…’
I gave a talk with Mark Wilson of Myleasehold recently at the ALEP conference on 20th March 2014 discussing the difference between formal and informal deals (particularly for lease extension).
I also prepared a list setting out a summary of the key differences. This was not distributed at the conference but readers may may find it useful, in which case here it is:-
1. The Formal Process (serving a notice) – what are the pros and cons of the ‘process’ itself
• 6-9 month process minimum probably more like a year (or possibly more) in Central London
• advantage Tenant – can take time to find funds
• disadvantage Landlord – has to wait for money and has to put up with valuation date from some months previous – in a rising market you are receiving ‘yesterday’s prices’ when funds are received
• both parties ‘locked in’ from service of notice – provided steps followed a result is guaranteed – although no certainty over the price at outset
• One size fits all solution for lease extension under the 1993 Act – plus 90 years and no ground rent – ‘universally understood’
• Statutory control over lease terms – less scope for ‘weird and wonderful’ terms to be introduced
2. Timing – issues for and against informal deals – informal will be quicker but no ‘lock in’
• No control over timing – but, could be instant
• Can do a deal with a third party landlord as part of sale and purchase – pay out of the proceeds of sale – ‘no cost’ – no need to find funds – provided this can be agreed
• Advantage landlord – instant payment
• No definite deal until either completion or contracts exchanged – plenty of scope to renegotiate the terms or walk away
3. Technical – does the formal process solve technical problems more easily?
• Deals with intermediate leases – on a lease extension there is a statutory surrender and re-grant
• Section 58(4) will automatically transfer the charge in a lease extension from old lease to new
• A statutory approach to valuation – and there is the tribunal if agreement is not reached
• Landlord’s costs covered under statute – s.33/ s.60 – and also controlled under statute
• An informal lease granted over the top of an existing lease (as a concurrent lease) can be messy – particularly consider co-terminous leases where there is an intermediate with a short reversion who is not a party (lease extension) the flat owner then has a discontinuous right of occupation when the under lease expires until the (normally very short) period of time until the head lease expires and the overriding lease kicks in.
• There is the risk that any superior interest to the flat that is not part of the lease of the flat may be enfranchised in a future freehold claim
• With an agreed deal there is no compulsion or fixed methodology to agree pricing – open market negotiation
4. What are the alternatives ? – if you have a choice…
• If a deal is done for sale of a freehold then section 5 Notices can be served under the 1987 Act – a lot easier to accept than dealing with s.13 and the 1993 Act
•In an informal situation the Landlord is at risk on costs without undertaking but can seek to recover such costs / costs contribution as it can negotiate for or can ask for these in a 1987 Act notice
• With an informal deal the parties are free to agree whatever length of extension they want – advantage tenant – can purchase a ‘top-up’ lease extension of less than 90 years
• This may be an advantage landlord who can then keep ground rent – However, if the deal is too good the tenant may ‘pay twice’ if the balance of premium and ground rent is skewed in their favour – higher ground rents might also deter future freehold claims
• In an informal deal there is no external control over new lease terms – either side can negotiate to their favour
5. Why also might the landlord insist on a statutory deal ?
Landlord can claim roll-over relief on funds received through ‘compulsory’ acquisition under enfranchisement legislation provided that he re-invests in a qualifying asset class (property). For an ongoing portfolio owner this has attractions.
It is important to understand that the landlord (and the transaction) has to ‘qualify’ for this roll-over relief – it is not ‘automatic’ but the detail is beyond the scope of this note.
Query from a tax point of view whether an agreed form notice and procedure resolves this issue – does this really work?
If the landlord’s assets are held in trust it is likely that the only approach will be under the legislation – the landlord will insist on this as there is a fully defined process under which it is compelled to act – and there is professional valuation advice – in part funded by the tenant as to the ‘correct’ amount to do the deal for
If the landlord has / is represented by professional trustees they may well be very reluctant to deal on this basis as there is no evidence that the asset either should be sold or that the price that is proposed/ has been agreed is ‘right’
Mark Chick
10 April 2014
This note (being very general in its nature) is not a complete statement of the law in this area. It is therefore not a substitute for legal advice from a suitably qualified professional and should not be relied upon as such. No liability can therefore be accepted for any actions based on reliance upon it.
If you require legal advice please visit www.bishopandsewell.co.uk