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Beware of informal lease extensions

Many clients, landlord or tenant, come to us having already negotiated terms for a lease extension. There are pros and cons of entering into a lease extension outside of the statutory framework of the Leasehold Reform Housing and Urban Development Act 1993 (which provides for a new lease on the same terms as the existing lease, save for a 90 year extension to the term and a reduction in ground rent to a peppercorn). A brief description of these pros and cons is given below.

PROS

  1. Flexibility – the parties can agree terms other than those specified by the Act. Landlords in particular may be able to obtain more favourable terms.
  2. Speed – the parties do not have to adhere to the time scales prescribed by the Act which can delay completion by 6-8 months. Landlords obtain their cash quicker and tenants who are looking to sell can do so sooner.
  3. Costs – legal costs are likely to be less expensive because statutory notices are not required.

 

CONS

  1. Poor value for money – tenants risk paying more by way of premium for what they are actually getting. Tenants can often achieve better terms making a statutory application.
  2. Other unsatisfactory terms – tenants may find themselves with terms or changes to the existing lease being imposed on them which are not satisfactory or more onerous.
  3. Withdrawal – a landlord may withdraw at any time and the tenant may be left still to make a statutory claim but the valuation date will then be much later which usually increases the premium.
  4. Costs – the tenant has no right to challenge the landlord’s costs.
  5. Lenders – lenders consents are needed and some lenders charge large administration fees for proving consent. Consents are not needed in a statutory claim.
  6. Tax – landlords cannot claim roll over tax relief