Level playing field for lease extension premiums

The case  “Chavda” like “ Sportelli “ is yet another case  in which the tenants attempted  to challenge the deferment rate to be applied to a lease extension. The tenants had asked the Leasehold Valuation Tribunal (LVT)  for the determination of the prices to be paid by the tenants for extensions to their leases.
The value of the prospective right to vacant possession, conventionally, is fixed by taking the open market value of the freehold interest with vacant possession at the valuation date and adjusting that value downwards by application of a "deferment rate".

The deferment rate is the annual discount applied on a compound basis to an anticipated future receipt (assessed at current prices) to arrive at its market value at the valuation date.

The assumption in the valuation of the freehold interest is that the market value of the unencumbered freehold in any property is likely to exceed the aggregate of the values of the interests of the tenant and the freeholder considered separately. That excess is commonly known as the "marriage value", which is a statutory term.

In reality, a tenant would be willing to pay a higher premium for the freehold interest in his building than other potential buyers. This is known as the "tenant's overbid".

In the case of Chavda a  number of points seeking to justify a higher deferment rate were raised  by the tenants . The most interesting of these was the argument that a different deferment rate should apply outside prime central London.

The Tribunal  considered and then dismissed a  number of legal points  presented by the tenants including : the tenants made up half the occupancy of the flats; the shabby external condition of the premises; the fact that there was a legacy of litigation between the parties concerning services and charges; disturbance from the adjoining road as well as the  overhead flight path; and the flanking road to the industrial estate to the rear.

On the subject of the location of the premises the LVT said as follows:

“The first factor was the property’s outer London location. The mere fact of location, however, does not self-evidently affect the deferment rate. The vacant possession freehold value of each flat is £175, 000, a mere fraction of the value of a flat situated in the PCL area. The question is whether, notwithstanding that location is so strongly reflected in the vacant possession freehold value, the notional purchaser of the reversion would make an additional allowance for it in determining what he would pay. If there was evidence that the prices of flats in outer London, or this part of outer London, appreciate more slowly over the long term than those of flats in the PCL area, there would be the basis for deducting a lesser growth rate than 2% from the risk free premium. If there was evidence to show that such prices were significantly more volatile than the prices of PCL flats, this could justify an adjustment to the risk premium. There is, however, no evidence that growth rates are slower or prices more volatile in this outer London location. There was no evidence at all on behalf of the tenants, while the Land Registry schedules for the period April 2000 to October 2007 produced by Mr Asbury show that for part of the time prices in Hounslow outperformed those in Kensington and Chelsea (up to March 2003, for instance, the increase in Hounslow was 43% compared with 26% in Kensington and Chelsea); up to September/October 2006 the increases were the same; while Kensington and Chelsea substantially outperformed Hounslow in the year between October 2006 and October 2007. These, however, are mere snapshots, and no conclusion can be drawn from them other than that they do not suggest that the long term growth rate is lower in this location than in the PCL area. ”

The Tribunal  commented that, in the light of Sportelli, the correct approach when considering issues such as this is to determine whether they are taken into account in the vacant possession value. If the facts dictate that they are not fully reflected – i.e. they would be of greater concern to the purchaser of the reversion than to the purchaser of the freehold with vacant possession – an adjustment to the risk premium might be justified. The LVT ruled that none of these factors justified such an reduction in premium.

There is no real difference in the conveyancing process of exchange of contracts between leasehold and freehold transactions even though there may be some contractual provisions specifically relating to the leasehold aspect of the property. Prior to exchange of contracts the seller's  property lawyer should have had the contract signed by their client ( sometimes the leasehold conveyancing lawyer  can be authorized by his or her client to sign the contract ) . Once the buyer has signed his contract and paid his deposit to his leasehold conveyancing lawyers account both parties should be ready to exchange contracts. Exchange takes place over the telephone between the leasehold conveyancing solicitors ( or property lawyer s ). The formalities are completed by each party forwarding the other his client's part of the contract, but it becomes binding at the end of the telephone call.

In order to complete the seller's leasehold conveyancing solicitor  or Leasehold conveyancing lawyer  must be holding a TR1 or Transfer Deed ( and other possible leasehold documents such as a Deed of Covenant or License to Assign – depending on the provisions of the lease ) signed by the seller landlord and buyer. Convention used to dictate that this Transfer Deed ( and other documents mentioned ) is drafted post exchange. Given the increasing desire for clients to have a short period between exchange and completion leasehold conveyancing lawyer s are now much more inclined to arrange for TR1 to be drafted, and signed, much earlier in the process ( the same logic applies to the Deed of Covenant and License to Assign ).

The seller’s leasehold conveyancing lawyer  must also have obtained a redemption statement in respect of the seller's mortgage/s, as he must give a binding assurance on completion to redeem all financial charges secured on the property.

The seller’s leasehold conveyancing lawyer should also check whether there are any outstanding service charges. Again this is because the seller would be contractually obliged to ensure that the service charge is clear. That being said the prudent leasehold conveyancing solicitor  should check themselves rather than just rely on a contractual obligation on the part of the seller.

The completion  date would have been agreed prior to exchange and inserted  in the contract. A couple of days before completion the purchaser's leasehold conveyancing solicitor  should carry out the completion searches. The leasehold conveyancing solicitor  or property lawyer   must also submit the Certificate on  Title ( sometimes known as a Report on Title ) to the lender. Many lenders require that the Report on Title be sent  5 working days ( 7 normal days ) prior to the day on which funds are required, however some do ask for longer. Some of the larger lenders such as those within the Royal Bank of Scotland ( RBS ) Group are not so rigid on this.   A lender, such as the RBS  they will not offer any guarantees and therefore contracts should not be exchanged for a completion date which does not allow time for the full notice period to elapse. If a simultaneous  exchange and completion is desire then exchange should be delayed until the advance monies are actually received.

Most lenders will be send the mortgage advance by way electronic transfer ( or BACS ). This method only guarantees that funds will reach the destination on the day of issue - it does not guarantee delivery by a certain time. It is sensible for the buyer’s leasehold conveyancing lawyer   to request the monies for the day or two prior to completion in order to reduce the risk of placing the purchaser in breach of contract.

In the case of a share of freehold where the share is in a limited company the purchaser’s leasehold conveyancing lawyer s should ensure that an appropriate stock transfer form is drafted and sent to the seller’s leasehold conveyancing lawyer s. There is no need for the purchaser to sign this form - only the seller. If the contract has been reviewed properly by the purchaser’s leasehold conveyancing lawyer  there will be a contractual provision obliging the seller to transfer his or her share in the freehold company to the purchaser on completion.

A few days before completion the seller’s leasehold conveyancing lawyer  should send the buyers lawyer a financial statement detailing the exact balance required from the purchaser’s leasehold conveyancing lawyer s on the date of completion. This is generally only provided in a leasehold transaction as the statement will contain a detailed apportionment of service charges. This apportionment calculates the amount the buyer has to pay back the seller where the seller has paid service charge and ground rent ( if any ) beyond the set completion date.

On the set completion day the purchase monies ( as per the financial statement ) will be sent by electronic money advance  to the seller's conveyancing  solicitor ( property lawyer ). Assuming his/her leasehold conveyancing solicitor  is in funds the seller must hand over possession to the purchaser by no later than the contractual completion time ( normally 2pm according to the Standard Conditions of Sale but often varied to 1 or even 12pm). The seller’s leasehold conveyancing solicitor  should telephone the seller as soon as the monies have arrived to notify him or her of completion and advise the estate agents ( if it is not a private sale ) to hand over the keys to the purchasers. Various penalties apply for late completion including draconian interest penalties and damages set out in the contract. Once the completion monies arrive the seller's leasehold conveyancing solicitor  must redeem all financial charges revealed in the official copies ( supplied in the Home Information Pack ) relating to the property and in accordance with the assurances mentioned above.

Post, completion the buyer’s leasehold conveyancing solicitor  or property lawyer must register the buyers new ownership at the Land Registry. There are 2 stages to the registration process. First, the Stamp Duty Land Tax return must be completed and submitted. Once the submission has taken place the Inland Revenue should  issue a certificate which must be in turn  sent to the Land Registry. The change of ownership can not take place without the said certificate being issued and sent to the Land Registry.

The next stage is to apply to amend the Land Registry Register by submitting a Form  AP1. There is no guaranteed time scale by which a registration process should be completed however it will generally take between 6- 8 weeks depending on which Local Land Registry is dealing with the application.

The lease relating to the property may well contain some specific post completion formalities for the buyer’s leasehold conveyancing lawyer . Most leases require notification of change of ownership as well as details of who new owners lender is. There is no prescribed form for this but most leasehold conveyancing lawyer s will use their own form. The reason why landlord’s require this Notice is that they need to know who to serve demands such as service charge and ground rent on. Landlord’s or their agents or own leasehold conveyancing lawyer s often charge for receipting these notices ( This can be as much as £75 per Notice ). It is also a requirement of all Lenders that Notices are receipted and kept with the deeds.   It may also be necessary to register the aforementioned Deed of Covenant with the Landlord or the Landlord’s conveyancing solicitor .

Once the post completion formalities have been finalised  the buyer’s Conveyancing  solicitor should supply evidence to both the buyer and the lender.

Assuming that no retention was required the buyer’s leasehold conveyancing solicitor  as well as the seller’s property lawyer will then archive the Conveyancing file ( and is obliged to keep it for 6 years ). It is generally a good idea for a buyer to keep copies of the relevant documents to hand as this may make it quicker and cheaper to get a Home Information Pack together in the future. Do remember that the EPC is valid for 3 years and ( if appropriate ) a copy lease costs £20. Both are an expensive part of a Home Information Pack. It also wise to keep a copy of the Property Information Questionnaire for future reference as well.  

You can get further advice on lease extensions from :-

LEASE ( The Leasehold Advisory Service ) Website:  www.lease-advice.org.uk