Are you letting out or letting go of your property?
Published 6 October 2014
Granting a long lease for a premium will provide you with funds to develop or invest, but beware that you do not also let go of the freehold.
Tenants of some types of lease can apply to the Land Registry to enlarge their leasehold title, which could lead to a separate freehold title being created in their name and your freehold title being reduced.
Section 153 of the Law of Property Act 1925 sets out the qualifying criteria for enlargement which include:
- The lease was originally granted for a term of 300 years or more;
- There are at least 200 years left to run;
- The rent is a peppercorn, or the obligation to pay it has ended;
- The lease has no forfeiture clause.
If a tenant is successful in its application, the possible consequences may include:
- a reduction in the value of your freehold interest;
- the creation of a separate freehold title, which could create a flying freehold - the relevant legislation does not provide for the necessary rights and covenants that would normally apply for the benefit of a flying freehold title and this could be a concern for any future owners/lenders; and,
- complications relating to the management and insurance of the property.
To avoid this risk, landlords could insist on a ground rent being payable and include a forfeiture clause to ensure that the lease fails to satisfy the criteria for enlargement.