Extending the lease term of your leasehold property can cost thousands of pounds.
The government has set out plans to make extending a lease easier and cheaper, but the law might not come into force for years yet.
An informal lease extension, also known as a voluntary lease extension, is potentially a way of doing so for less money. However, it is not without risk.
Importance of extending a lease
Leasehold properties are, of course, where the 'owner', the leaseholder, has a long lease, possibly that lasts hundreds of years, that grants them the right to occupy their home. However, the land that the property sits on remains owned by the landlord, the freeholder.
When the lease ends, ownership of the property reverts to the freeholder. To prevent this happening, the leaseholder needs to extend the lease.
The Leasehold Reform, Housing and Urban Development Act 1993 (the LRA) gives leaseholders rights to extend a lease, but if the remaining lease term falls below 80 years then the freeholder is entitled to be paid a half share of the increase in value of the leasehold (known as the marriage value) that would arise from extending the lease. The concept of marriage value is explained further in this separate article.
Since this can be a lot of money, which the leaseholder may not have, mortgage lenders can be reluctant to lend on properties with short leases. That in turn makes selling a property with a short lease difficult, further reducing its price.
Types of lease extensions: informal and statutory
Leaseholders have two options when seeking to extend their lease: an informal lease extension and a statutory lease extension.
Informal lease extension
An informal lease extension is a private agreement between the leaseholder and the freeholder to extend the lease terms.
The leaseholder and freeholder can renegotiate the entire lease, including length of the extension, any premium payable, and any changes to ground rent.
Statutory lease extension
A statutory lease extension (sometimes called a formal lease extension) is a process governed by the LRA, which grants leaseholders the legal right to extend their lease by 90 years for flats or 50 years for houses. From 2022, ground rents are capped at a peppercorn, effectively zero.
To be eligible for a statutory lease extension, a leaseholder must have owned the property for at least two years and the original lease term must have been at least 21 years.
The statutory route offers leaseholders more robust legal protection and rights than the informal route, ensuring that the lease extension process is fair and transparent.
The statutory process involves serving a Section 42 notice to the landlord, which outlines the leaseholder's proposal for extending the lease, including the premium they're willing to pay.
The landlord can then respond with a counter notice, and negotiations can start.
Informal lease extension process
Informal lease extensions hinge on negotiating a fair price and a low premium with your landlord or agent.
Step 1: Freeholder or the leaseholder makes an offer
Keep in mind that it is in the freeholder's interests to extend the lease informally before the you do so formally. That way, the freeholder has a chance to obtain better terms from you on the extended lease because you're on the back foot. The reason there is a formal route is to give the leaseholder protection against a more experienced, commercially focussed freeholder.
You do not have to accept the freeholder's offer. You can either suggest other terms, or refuse entirely and go down the formal route.
Or it might be you that makes a first offer. To do this, you can approach the managing agent or the freeholder directly. The freeholder's address will be on the ground rent receipts you receive, or you can find it through a search for your property at the Land Registry. Be aware that most managing agents don't have authority to negotiate a lease informally.
Step 2: Valuation and premium payable
There are many online calculators that can give you good general indications of what you might pay for an extension of your lease, but you'll need to instruct a RICS qualified chartered surveyor to give you an accurate valuation of your property after extension, which influences the premium you'll pay the freeholder to extend.
Because with the informal route you can agree to an extension of any length of time, and not just 50 or 90 years, your freeholder is likely to offer a premium that is more expensive for extended term than they would if you were using the statutory route. Simply, they know its more difficult for you to gauge whether the price you pay them is fair if they offer an extension for a length of time you haven't considered.
One way of countering this is to ask your surveyor to provide valuations for both a time period that is offered informally, and for the formal extension period. You can then judge better whether an offer is fair.
Instructing a solicitor and RICS surveyor
Although you could handle the process yourself, we strongly recommend enlisting the help of a specialist solicitor.
You instruct your solicitor, and provide proof of funds to pay for the premium and the fees.
The freeholder sends your solicitor the new lease with all the terms.
The new lease is reviewed, amended and finally signed by you.
If you have taken out a mortgage, your solicitor and your mortgage lender complete a deed of substituted security (an amendment to the original mortgage).
The premium is paid to the freeholder and the transaction complete.
Your solicitor registers the new lease at the Land Registry
Pros and cons of informal lease extensions
Pros
Possibly a quicker process than the statutory route - informal lease extensions can often be completed more quickly than statutory lease extensions.
Potential for lower premium and legal fees - an informal extension can potentially result in a better value for both parties, as you may be able to negotiate a premium that is lower for you and reduced legal fees compared to the formal route.
Share of freehold owners can negotiate a 999 year lease for no premium.
Flexibility in negotiation - the informal process allows for more flexibility in negotiating terms, as you and your landlord or their agent can work together to find a mutually agreeable arrangement.
Cons
Less legal protection - choosing the informal route means you'll have fewer legal rights and protections compared to a statutory lease extension.
Unfavourable ground rent terms - Without the legal protections of a statutory lease extension, you may be more susceptible to unfavourable ground rent terms, which can impact the overall cost and value of your lease extension. Through the formal route, ground rent must be reduced to at most a peppercorn each year.
Shorter extension and lease terms - informal lease extensions often result in shorter extension periods and lease terms compared to the statutory route, which can impact the long-term value of your property.
Uncertainty, potential delays, and bad deal risks - The informal process is less structured, which can lead to uncertainty, delays, and the risk of a bad price or terms. Engaging a good solicitor can help mitigate these risks.
Choosing the right route: informal vs. statutory lease extension
Assess your financial situation and determine what you can afford in terms of premium and legal costs.
Examine the length of your current lease and consider whether a short document is sufficient, or if a more substantial extension is necessary.
Your relationship with the landlord or their agent can play a significant role in the success of negotiations. An amicable relationship may allow for a smoother informal lease extension process, while a contentious one might warrant the protection of the statutory route.
Reflect on your desired lease extension terms and weigh the importance of time constraints and priorities in your decision.
Alternatives to lease extension: buying the freehold
Leasehold reform and collective enfranchisement
Collective enfranchisement refers to the process where leaseholders band together to purchase the freehold of their building. Reform in the UK has enabled this option, allowing you to own a share of the freehold and have greater control over the property.
Advantages of owning the freehold
Control over ground rents and property management - owning the freehold gives you some decision-making power regarding property management.
Attractiveness to potential buyers - this ownership status frees possible buyers from ground rent and lease term concerns.
Purchasing the freehold can be a wise investment, as it enhances the long-term value of your home.
Process of buying the freehold
You'll need to negotiate the purchase of the freehold with the same caution and tact as if you were seeking a lease extension.
There will be legal and valuation fees to pay. But the long-term benefits of owning the freehold may outweigh the initial costs.
Of course, you'll also need to find the purchase price of the freehold.
Serving a Section 5 notice on the landlord formalises the purchase after reaching an agreement.
Updating the Land Registry to reflect the new ownership status is necessary once the transaction is complete.
With the help of a solicitor, navigating the legal requirements can be manageable.
Note you can also seek an acquisition order if the landlord has failed in their obligations to maintain the building.
Conclusion: making an informed decision on lease extension
Understanding your options and their implications
Leaseholders have various options when it comes to extending their lease or buying the freehold.
Informal lease extensions offer flexibility and potentially lower costs, while statutory lease extensions provide legal protection and more favourable lease terms.
Understanding the implications of each option is essential for making the best decision for your unique situation.
Considering your unique situation and priorities
Circumstances vary for every leaseholder, making it crucial to weigh up your financial situation, the length of your current lease, and your relationship with the landlord or managing agent.
Carefully considering which path to take and tailoring it to your specific needs and priorities is vital.
Work with professionals for a successful lease extension
Specialist solicitors and RICS surveyors can help you make well-informed decisions, save time, and minimise risk in the world of lease extensions and freehold purchases.
Although you may be able to carry out some tasks yourself, using professionals ensures a smooth and successful process, ultimately saving you time and money.