Recap of the basics
What is a lease?
A lease is a contract that creates an interest in property. It is between a lessee (a tenant or a leaseholder) and a lessor (a landlord or a freeholder).
A lease gives the leaseholder rights to occupy a property for a defined period (the lease term) in return for paying a ground rent annually or a capital sum at the outset (known as a premium). The parties may have other rights and responsibilities under the lease agreement.
When the leasehold term ends, ownership of the property reverts to the freeholder.
What is a lease extension?
Lease extension typically refers to the process of increasing the number of years remaining on your lease.
Should I extend my lease?
120+ years remaining
You can relax. You already have a reasonably long lease. But consider there may be benefit to extending it. Principally, if you extend it via the formal process, you won't have to pay ground rent any longer.
You may want to wait some years to see if new law gives you further rights in respect of extension. Recent proposals have now been shelved, but given that there are many households who own leasehold property, reform is a relatively easy vote winner.
85+ years remaining
Our opinion is that if you have more than 85 years remaining, you'll benefit from a longer lease, whether you want to stay in the property or sell it. You still have a couple of years to save up for the costs, but an extension should be in your calendar, particularly if you plan to move.
Less than 83 years remaining
Yes, you should extend your lease.
Why you might consider extending your lease
In summary, because:
- when selling your home, buyers tend to view long remaining lease terms as attractive and therefore valuable - equivalent to freehold ownership;
- it is more expensive to extend once there are fewer than 80 years left on the lease;
- it is hard to obtain a mortgage (or remortgage) on a short lease; and
- any existing lease that is extended using the statutory extension process will change so that nil ground rent is payable by the leaseholder.
You can read more about the implications of short leases.
Short remaining lease terms
The value in extending your lease before it becomes short arises as a result of two rights that the freehold owner has: the right that the property reverts to them when the lease ends, and the right to be paid half of the marriage value in exchange for extension of a short lease.
There is no definition for a short lease, but generally the term is used to describe a lease with a remaining term of less than 80 years.
Marriage value is the value increase created by extending the lease. For example, if a property is worth £180,000 when it has 70 years remaining and £260,000 when the lease is extended by 50 years, then the marriage value is £80,000.
There is also an eligibility criterion to consider - a leasehold owner does not have a right to extend in the first two years of ownership, unless the extension process was started by the previous owners.
As a result of these rules, most mortgage lenders tend to refuse to lend on any property whose lease will expire within 83 years. They cannot be sure that the borrower will extend the lease, and if the remaining term drops into 'short' territory, if the borrower defaults on the mortgage, the bank may not be able to recover the mortgage outstanding because the value will have fallen by half the marriage value. Over time, the marriage value increases and the property becomes poorer security for the loan. Of course, if the lease ends before the mortgage term, the lender loses all their money.
Why might an owner not extend the lease?
The primary reason is cost, particularly compounded with short leases by the requirement to pay the freeholder half the marriage value. Not many people who have mortgages also have half the marriage value in cash.
That many lenders won't give a mortgage on a leasehold property with a short remaining lease term creates two problems:
- remortgaging is impossible, leaving a current owner with a higher interest rate to pay; and
- when it comes to sell, only cash buyers can afford to buy. Because there are not many of them, the price of the property is further suppressed.
Step-by-step guide to extending your lease: formal and informal routes
There are two routes you can take.
The Leasehold Reform Housing and Urban Development Act 1993 gives a leaseholder a right to seek an extension and for it not to be refused unless the freeholder has one of a few very specific reasons not to do so.
This formal route is defined. It is not a complex process to follow, but it does need to be done correctly, within the prescribed time frames for each stage. Making mistakes can be costly, which is why seeking independent advice from experienced lease extension practitioners can be so valuable in the long run despite the immediate cost.
There is also the informal route, which is a negotiation.
The reason that there is a formal route is because in an informal extension process, the freeholder has greater bargaining power.
Before choosing either route
Eligibility check for the statutory route
Check whether you meet the eligibility criteria required for the formal route. To be a qualified leaseholder, you must have owned the property for at least two years and the lease must have been originally granted for a term exceeding 21 years.
Financial readiness
Make sure you can pay all the costs, including the reasonable legal costs of the freeholder.
Mortgage lender's approval
If you have a mortgage on the property, you will need your lender's consent for the lease extension. They probably won't give it until the terms of the extended lease are clear, but you should tell them in advance that you intend to extend.
Discover the freeholder
Identify who owns the freehold of your property. In cases where the freeholder is absent, be aware that you may need to apply for a vesting order.
Value your property
Engage a professional surveyor (ideally a member of the Royal Institute of Chartered Surveyors (RICS) and the Association of Leasehold Enfranchisement Practitioners (ALEP)) to give you several valuations: at the current date, with the maximum extension given by law (50 years for houses, 90 years for flats and maisonettes), and with any other period you might want.
Find a specialist solicitor
Find, but don't yet engage an experienced solicitor who specialises in lease extensions.
Contact the freeholder
Discuss extending your lease with the freeholder, either personally or through your surveyor or solicitor.
Formal lease extension process
If you're happy to follow the statutory route for extension, these are the next steps:
Make an informal offer anyway
If your freeholder shows a willingness to negotiate, propose an informal offer. Informal offers can be much less expensive. However, be aware that with an informal agreement, you may give up some of your rights without realising. There are many horror stories, and putting right mistakes can as expensive as extending the lease in the first place.
Serve a Section 42 Notice
Whether or not the freeholder accepts your informal offer, serve a Section 42 Notice (known as a Tenant's Notice). If the freeholder hasn't accepted your informal offer, your solicitor will serve this notice, initiating the statutory process. You will need to give the price that you are willing to pay for the premium in your initial notice.
Pay the deposit
You'll have to pay a deposit within 14 days, amounting to the higher of £250 or 10% of the lease extension cost.
Wait for the landlord's counter notice
The freeholder will respond with a Section 45 Notice (known as a Counter Notice), accepting your offer, proposing new terms, or rejecting your claim.
Consider applying to the First-tier Tribunal
If an agreement seems elusive, the First-tier Tribunal (Property Chamber) will hear your case. Because this is a type of court, proceedings from here on can become lengthy and expensive. The Tribunal replaces the Leasehold Valuation Tribunal.
Finalising the lease extension
Your solicitor will complete the extension process, ensuring all legal requirements are met.
Informal lease extension process
The informal route, unlike the formal process, involves direct negotiation with the freeholder.
This path doesn't have the same statutory protection, but it can provide flexibility, potentially saving time and money. Here's a general outline of how to extend your lease informally:
Make an offer
Propose an informal offer to the freeholder based on the surveyor's valuation.
Negotiate terms
Discuss terms such as the new lease length, ground rent (which by law must be reduced to a peppercorn if the statutory route is followed), and the premium. The new lease length can be any number of years.
Finalise the new lease
Once both parties are in agreement, your solicitor will draft the new lease and arrange for its registration with the Land Registry.
How much does it cost to extend a lease?
Premium
The premium is the payment made to the freeholder for extending the lease.
It's calculated based on a variety of factors including the value of your property, the length of the remaining lease, and the annual ground rent.
The value of the premium can be negotiated, but usually it is based on a formula set out by law.
You can use an online lease extension calculator to help you estimate the likely cost of extending a lease. While not definitive, it can offer a ballpark figure to aid your financial planning.
A competent valuation surveyor can tell you best and worst case scenarios, which can help you plan.
Your surveyor will be the best person to negotiate your premium because they'll be able to argue why the price should be as it is. They'll be able to anticipate what the freeholder might claim, and give believable counter claims.
Professional fees, legal costs and taxes
The valuation surveyor assesses the value of your property to help determine the premium for your extension.
Valuation fees are an integral part of the lease extension costs. An accurate lease extension valuation can potentially save you money by ensuring you're not overpaying.
Being given the right advice at the right time by someone who knows your local property market can make the process smoother and can save money. An experienced lease extension practitioner can guide you through the statutory process, negotiate on your behalf, and ensure you avoid potential legal pitfalls.
How long does it take to extend a lease?
Via the statutory route, expect it to take at least 4 months and up to 12.
The reason why is that:
- you need to take valuation advice, which can take time to organise
- when you serve a Section 42 Notice, the respondent has 2 months to reply
- a further 2 months is allowed for negotiation
if there is then no resolution, the matter could go to the First-tier Tribunal, which could take up to a year.
If you negotiate informally, then it could take just a couple of months if you have a responsive freeholder.
Potential challenges in the lease extension process and how to handle them
Unresponsive or absent freeholder
It might not be apparent who the freeholder is, or you may not receive any response from them when you try to contact them.
Without their cooperation, your endeavour to extend to a long lease may encounter a dead end. However, there's a legal provision to help with this.
A vesting order is a court order. It allows you to proceed with the an extension even when the freeholder is absent.
Ground rents and service charges
Ground rent is the annual sum paid to the landlord. It typically increases over time.
The law now says that the ground rent must be reduced to no more than a peppercorn (effectively zero) on new and extended leases, provided that the statutory route is followed.
With the informal lease extension route, your landlord may still try to charge it. You can accept paying it in return for preferable terms elsewhere in your lease, but be aware that the freeholder would no longer have any right to it if you weren't negotiating, and that having to pay a ground rent might put off potential buyers when you want to sell your property later.
Service charges, on the other hand, cover the costs of maintaining common areas in the building. These may be less negotiable, since they are likely to be calculated on a basis of floor area relative to other leaseholders. In an extended lease, you want to be very clear about what they cover, to make sure that they cannot be increased for new services over time.
Complex processes: collective enfranchisement and dealing with an intermediate landlord
Collective enfranchisement is a process where qualifying tenants band together to buy the freehold. It is an alternate path worth exploring.
However, it has its complexities. In addition to meeting certain criteria, you'll need the cooperation of at least half the other tenants in the building. They in turn will all need money to buy their share of the freehold.
Occasionally, you might have an intermediate landlord, someone between you and the freeholder. They might be less able to negotiate better terms with you, because they are bound by terms with their landlord. Dealing with an intermediate landlord requires careful consideration and potentially expert advice from experienced solicitors.
Future considerations: the changing legal landscape
The Leasehold Reform Housing and Urban Development Act 1993 gave leaseholders far more rights than ever before - the right to extend their lease or collectively purchase the freehold.
The Conservative government has proposed several times further reforms that would give leaseholders even more rights in respect of extensions - effectively transforming leasehold ownership into freehold ownership.
The plans have currently stalled, although the may be resurrected in a future parliament.