A client recently asked me to advise in the level of premium payable to extend a long lease he already owns of well over 90 years but subject to a reasonably onerous ground rent that doubles every 25 years. As the property is held on a Crown Estate lease in an Excepted Area – it is not bound by neither the Leasehold Reform Act 1967 (as amended) nor the Leasehold Reform, Housing and Urban Development Act 1993 (as amended).
As much as the Crown has given an undertaking to Parliament that in most cases it will give similar benefits to their tenants where possible “by analogy” with the legislation, it will only extend a lease (on the basis it would qualify as if under the Acts) up to a maximum of 150 years and “a rent will be payable.”
The following points arise:
- If the new lease is to continue on the same passing rents but extended over another 50+ years, then the value of the Crown’s future interest after the lease has been granted will increase substantially. As a result the premium payable is considerably reduced.
- This in turn produces an interesting valuation conundrum in that below a certain source rate £psf for the freehold value, one ends up with a negative premium payable. I hardly think the Crown will extend the lease and pay my client for the pleasure!
- This then brings into question whether the Crown should consider granting extended leases at a peppercorn rent which would not only fit better “by analogy” with the LRA legislation but is particularly pertinent in light of recent adverse press comment on rising ground rents and Parliament’s intention last December to outlaw such practice on newly built homes.
- So not only would it receive higher premiums up front (in lieu of a reduced annual ground rental income), but the excuses its valuers give why they have to continue to collect rents in order to pay for the upkeep of the fine Nash terraces surrounding Regents Park will no longer need to be made. (This is what accumulating reserve funds collected through the service charges are for – surely?)
The result of this is my client has now applied for a lease extension on two bases –
- On the continuing rent regime but offering a low nominal premium, and
- At a peppercorn rent basis pa but for a more meaningful premium.
I await to see what the Crown and their valuers say in due course.