Protect it, don’t lose it – the right to a lease extension

Couples are often leaseholders, sharing ownership of a flat in their joint names. Leasehold property held as a shared asset must be dealt with as part of the overall financial settlement following the breakdown of a relationship. 

The value of leasehold property as an asset is constantly diminishing, as the leaseholders merely own a contractual right to occupy the premises for a term of years specified in the lease. This term decreases daily from the date the lease commenced and the freeholder, also referred to as the landlord, will be entitled to possession of the flat at the term date.  

The Right to a Lease Extension

Leaseholders, also referred to as tenants, are granted rights within the lease and under statute. The most notable right, to assist with the diminishing value, is the right to a lease extension. The landlord must extend the unexpired term by an additional 90 years in accordance with the Leasehold Reform Housing and Urban Development Act 1993. 

There are several conditions to be met for the tenants to be eligible, of these the tenants must be a “qualifying tenant”. 

Two Year Ownership Condition

A condition incorporated into the 1993 Act in 2002 (by Section 127 of the Commonhold and Leasehold Reform Act 2002) we consider to be pertinent in a Family Law context. Section 39(2)(a) of the 1993 Act requires that a tenant must have been a qualifying tenant of the flat for the last two years. 

This ownership period is calculated by reference to the date the tenant’s Section 42 notice, seeking the lease extension, is served on the “competent landlord”. As the tenants only become the legal owner of the property on registration at the Land Registry (Section 27 of the Land Registration Act 2002), the two-year period of ownership is considered to start from the date the tenants are registered as proprietors (Wellcome Trust Limited v Baulackey [2010] 1 E.G.L.R. 125).

Where the tenants are registered jointly, whether as joint tenants or as tenants in common, reference to a qualifying tenant in the 1993 Act is reference to both parties jointly constituting the qualifying tenant (Section 101(4) of the 1993 Act). It is considered that if during the relationship the parties were registered jointly for at least two years they would together be regarded as jointly constituting the qualifying tenant of the flat to meet the condition (Section 39(4)(b) of the 1993 Act).

Transfer of Equity

Upon the division of assets, the equity in the flat may be transferred to one of the tenants. 

If one party is transferred ownership to the flat they will need to consider extending the lease and the appropriate time to serve the Section 42 notice. If the transfer of equity completes before a Section 42 notice is served, the competent landlord may argue that the party now registered at the Land Registry, Tenant A, does not constitute the qualifying tenant (formerly Tenants A and B). 

“If the transfer of equity completes before the section 42 notice is served, the competent landlord may argue that the party now registered at the Land Registry does not constitute the qualifying tenant”

The two-year ownership period would have to start again from the date the transfer is registered. This will mean that the party retaining the flat, Tenant A, will not be entitled to extend the lease until they have been registered at the Land Registry in their sole name for a further two years, by which time the Lease term will be even shorter and is likely to increase the premium payable. 

The position is arguable for the flat held by joint tenants, on the basis that the lease is held on trust for both parties and a change in the composition of the trust should not affect the period of joint ownership already acquired to meet the two year condition (c.f Marsh v Gilbert [1980] 2 E.G.L.R. 44). However, Tenant A would be at risk in the circumstances if a Section 42 notice were served and the competent landlord asserted that the notice is invalid. Tenant A could not reverse the transfer of equity at that stage. 

Valuation

If the unexpired term of the lease is 82 years or less, Tenant A could be at an even greater financial risk. When a lease falls below a term of 80 years, even by a day, the valuation includes an additional amount known as “marriage value”. The premium payable by the qualifying tenant increases substantially by the addition of marriage value the shorter the remaining lease term falls.  

Conclusion

We recommend that tenants with leasehold property as a shared asset seek specialist legal and valuation advice alongside the family law advice. 

It is possible to synchronise the lease extension and transfer of equity transactions to ensure that the party retaining an interest in the flat protects their joint two-year ownership period and does not lose their right to extend the lease. 

 

Written by Gemma Hawthorne and Elaine Flynn

 

ghawthorne@jsf-law.co.uk 

eflynn@jsf-law.co.uk  

 
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