Question 1

Lease Variation

Accepted Answer

Q: Lease Variation Now that we have reached the 80 year threshold in the unexpired term of the leases, we are being asked by leaseholders (or their solicitors) about an extension to the term when carrying out a sale or re-mortgage. Our normal response to this is that because of the ‘Share of Freehold’, the term length is now irrelevant and that the leases are nominally now 999 years with zero ground rent. Nobody has come back on this. First a bit of history. We brought our freehold in 1997. At the time the freehold consisted of two dissimilar blocks of in total 26 flats (18 + 8). The flats were let on 120 year terms from 24/6/1975 and all the leases are the same. In 2007, we decided that it was in the interests of the leaseholders to divide the freehold into 2 independent freeholds, with each block managing its own affairs. Therefore, we became responsible for the block of 18 flats. Since the purchase of the freehold, no ground rents have been demanded or paid. It has been decided that we should investigate the possibility of making this informal arrangement official and avoid any possible future problems. Any lease extension would be carried out on the following basis: 999 year term, peppercorn rent and no premium to be payable. The leaseholder is responsible for all costs and fees (their own and ours), either singly or collectively. The options available are:

Do nothing
Single leaseholder – a leaseholder applies for a lease extension as and when
Group of leaseholders – in order to reduce costs a group of leaseholders band together
Modernise / bring up-to-date the leases
Formal letter – we write a letter to all leaseholders clarifying the current informal position; officially granting a 999 year lease with a peppercorn rent.

Initial investigations have shown that a lease extension may cost £400+ per flat. Of course, this is not our problem as the freeholder but a leaseholder one. Although it might be in their long-term interests, we cannot force a leaseholder into carrying this out. FPRA Hon Consultant Yashmin Mistry replies: You are correct in that it is a common question that is posed. In general terms, whilst each flat has a share in the freehold company, the lease still remains in tack and the lower lease length may become an issue and/or more of problem on sales and purchases once the leases have dropped below 80 years. The reason being is that lenders, regarding of whether the flat has a share in the freehold, get nervous when lending against lease that have less than 80 year remaining. In addition, the lease terms still stand as per the lease until deeds of variations are entered into. From the email we understand the service charge has been split between the two blocks despite what the lease still states and although none of the residents have questioned this so far, potentially the freehold company could be challenged for not charging correctly and in compliance with the lease terms. In terms of the proposal, it does seem sensible to extend all leases and modernise and update the leases. At the same time formalising the position that now exists in practice. There may however be one drawback and it may be necessary to obtain specialist legal and accounting advice. We note that when the freehold was acquired the leases were still relatively long. In any case, subject to receiving specialist legal and accounting advice, it may be that before new leases are granted application should be made to HMRC for tax clearance. The necessity for taking such a step is not widely known. The problem is that leaving aside any considerations regarding the circumstances of the purchase, in a case where a company grants a 999 year lease without payment of consideration there are two possible scenarios where tax may be payable as follows:

The company could be deemed by HMRC to have received the value of the lease extension granted upon which corporation tax will be payable.
The shareholder receiving the benefit of the lease extension could be held to have received a distribution from the company equivalent to the value of the lease extension and would be liable to pay income tax on the amount so received.

In both situations there could be a tax liability even though no money is paid by the shareholder lessee to the freehold company. In order to obtain clearance from HMRC for the grant of 999 year leases to shareholder lessees it is necessary to establish to the satisfaction of the Revenue that the freehold was at all times owned by the freehold company as a bare trustee or nominee for the shareholders. This requires significant work as we would need to research further into the matter and the draft a detailed submission to HMRC for consideration. In the circumstance as per the above, a specialist lawyer or accountant should be consulted before proceeding to grant the new leases. [Submitted April 2016]

Question 2

Lease Variation

Accepted Answer

Q: Lease Variation Now that we have reached the 80 year threshold in the unexpired term of the leases, we are being asked by leaseholders (or their solicitors) about an extension to the term when carrying out a sale or re-mortgage. Our normal response to this is that because of the ‘Share of Freehold’, the term length is now irrelevant and that the leases are nominally now 999 years with zero ground rent. Nobody has come back on this. First a bit of history. We brought our freehold in 1997. At the time the freehold consisted of two dissimilar blocks of in total 26 flats (18 + 8). The flats were let on 120 year terms from 24/6/1975 and all the leases are the same. In 2007, we decided that it was in the interests of the leaseholders to divide the freehold into 2 independent freeholds, with each block managing its own affairs. Therefore, we became responsible for the block of 18 flats. Since the purchase of the freehold, no ground rents have been demanded or paid. It has been decided that we should investigate the possibility of making this informal arrangement official and avoid any possible future problems. Any lease extension would be carried out on the following basis: 999 year term, peppercorn rent and no premium to be payable. The leaseholder is responsible for all costs and fees (their own and ours), either singly or collectively. The options available are:

Do nothing
Single leaseholder – a leaseholder applies for a lease extension as and when
Group of leaseholders – in order to reduce costs a group of leaseholders band together
Modernise / bring up-to-date the leases
Formal letter – we write a letter to all leaseholders clarifying the current informal position; officially granting a 999 year lease with a peppercorn rent.

Initial investigations have shown that a lease extension may cost £400+ per flat. Of course, this is not our problem as the freeholder but a leaseholder one. Although it might be in their long-term interests, we cannot force a leaseholder into carrying this out. FPRA Hon Consultant Yashmin Mistry replies: You are correct in that it is a common question that is posed. In general terms, whilst each flat has a share in the freehold company, the lease still remains in tack and the lower lease length may become an issue and/or more of problem on sales and purchases once the leases have dropped below 80 years. The reason being is that lenders, regarding of whether the flat has a share in the freehold, get nervous when lending against lease that have less than 80 year remaining. In addition, the lease terms still stand as per the lease until deeds of variations are entered into. From the email we understand the service charge has been split between the two blocks despite what the lease still states and although none of the residents have questioned this so far, potentially the freehold company could be challenged for not charging correctly and in compliance with the lease terms. In terms of the proposal, it does seem sensible to extend all leases and modernise and update the leases. At the same time formalising the position that now exists in practice. There may however be one drawback and it may be necessary to obtain specialist legal and accounting advice. We note that when the freehold was acquired the leases were still relatively long. In any case, subject to receiving specialist legal and accounting advice, it may be that before new leases are granted application should be made to HMRC for tax clearance. The necessity for taking such a step is not widely known. The problem is that leaving aside any considerations regarding the circumstances of the purchase, in a case where a company grants a 999 year lease without payment of consideration there are two possible scenarios where tax may be payable as follows:

The company could be deemed by HMRC to have received the value of the lease extension granted upon which corporation tax will be payable.
The shareholder receiving the benefit of the lease extension could be held to have received a distribution from the company equivalent to the value of the lease extension and would be liable to pay income tax on the amount so received.

In both situations there could be a tax liability even though no money is paid by the shareholder lessee to the freehold company. In order to obtain clearance from HMRC for the grant of 999 year leases to shareholder lessees it is necessary to establish to the satisfaction of the Revenue that the freehold was at all times owned by the freehold company as a bare trustee or nominee for the shareholders. This requires significant work as we would need to research further into the matter and the draft a detailed submission to HMRC for consideration. In the circumstance as per the above, a specialist lawyer or accountant should be consulted before proceeding to grant the new leases. [Submitted April 2016]

Lease Variation

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