Real Estate things you once knew but may have forgotten - Upgrading of long leases to freehold

Upgrading of long leases to freehold

Landlords need to be aware when granting a long lease that there may be a chance that the tenant could upgrade this lease to a freehold interest. This is because of Section 153 of the Law of Property Act 1925 which enables the tenant of a long leasehold interest to enlarge it into a freehold interest in certain circumstances. The main circumstances which must apply if the enlargement is to be successful are as follows:

1. the term originally created by the lease must have been for not less than 300 years and, at the time of the proposed enlargement, there must be at least 200 more years to run under the lease

2. the term must not be one which can be forfeited or determined by re-entry for any breach of covenant

3. there must be no superior lease which is itself incapable of enlargement.

4. there must be no rent payable pursuant to the lease or merely a peppercorn rent or other rent having no money value. Alternatively the rent must have become barred by lapse of time or otherwise cease to be payable.

The first three of these conditions is fairly straightforward. The question as to what would be a rent having money value is somewhat more nebulous. There are a couple of historical cases regarding what is money value which found that a rent of one shilling was a rent which did have a money value, but a rent of a silver penny was not considered to have any money value. The Act specifically states that a rent not exceeding 1 GBP per annum which has not been collected or paid for a continuous period of 20 years or upwards will for the purposes of Section 153 be deemed to have ceased to be payable.

If a freehold interest is acquired by enlargement it will be subject to the same covenants and provisions relating to user and enjoyment and all the same obligations as the lease would have been subject to if it had not been enlarged. This will create difficulties in relation to the enforcement of positive covenants.

It is therefore very important to remember when granting a long leasehold interest over 300 years to reserve a decent amount of rent to ensure that a tenant cannot rely on the benefit of this section. No more peppercorns!!

If you require any further information on this subject please contact Sally Badham on +44 (0)20 7367 2447 or at [email protected].