Lease extension basics: How to extend your leasehold
- By: Ashley Saunders
- July 2020
As a leasehold property owner, the value of your home is linked to the remaining length of the lease. The longer remaining on the lease, the better for you as a homeowner. But what should you do if it’s running out? Try to negotiate a lease extension.
The process of extending a lease can be fairly complicated and costly. We’ll explore what’s involved, costs and how to get the right expert help. Our advice will guide you through every step of your lease extension while helping you to avoid common issues.
Why it’s worth extending your lease?
The shorter the lease, the less valuable the property and more difficult or even impossible it becomes to mortgage.
Once a lease drops beneath 80 years, the property’s value can be reduced significantly as it’s far more expensive and difficult to lengthen the lease once it drops below this figure. A property with a short lease is far less appealing to potential buyers.
If your lease has 80 or less year remaining, to extend it, you’ll be required to pay 50% of the flat’s ‘marriage value’. The marriage value is the extra property value you’d gain by extending the lease or collectively buying the freehold with the other tenants that share your lease (known as collective enfranchisement).
This could represent a substantial amount of money, so it’s wise to consider lease extension before you get near the 80-year threshold.
Can you ask for an extension on your lease?
Under The Leasehold Reform, Housing and Urban Development Act 1993, any leaseholder who held the lease for at least 2 years, has the right to seek an extension of his lease. There are actually very few grounds for denying lease extensions.
While it’s called an extension, you’re actually creating a completely new lease. This means the terms of the new lease may be different. You have the option to seek a formal or informal lease extension. We’ll cover these options in more depth shortly.
Is it complicated to calculate a lease extension?
Calculating an extension is quite complex as there are so many factors involved. And while the freeholder could theoretically plug a number out of thin air, this could merely be seen as a starting point.
Calculating a lease extension depends on the property’s value, the number of years remaining on the current lease, and the annual ground rate as well as the value of any improvement the leasehold has made and many external factors including the rate of return on investment.
It’s quite complicated to calculate, especially when you consider many of these elements will need to be negotiated. You might be able to negotiate a fair price or as a last result obtain a decision by a tribunal.
While you can use a lease extension calculator to estimate the premium you’ll have to pay the freeholder to extend the lease, ideally, you’d work with a surveyor who has experience of lease extensions. They’ll be worth the investment and ensure your paying a fair price for your extension.
Will I have to pay additional costs?
As well as paying the premium you’ll need to pay all of the costs including those of the freehold (required by law). These costs include:
- Your legal advice
- A lease extension valuation report (conducted by a surveyor)
- Land Registry fees
- The freeholder’s reasonable legal costs and valuation costs
Should I get legal advice when extending my lease?
Unless you negotiate complex contracts for a living, and even if you do, it’s best to hire the best team you can afford. Of course, you’re free to negotiate with the freeholder (known as informal process), however, this is not without risks.
By dealing directly with the freeholder, you may be able to cut costs by not paying for the freeholder’s costs. This means you’d only have to pay your legal and valuation costs. However, the risks are massive.
You may save on a few thousand on costs but you could substantially overpay on the lease extension by tens of thousands and in the worst-case scenario, make your home unsaleable.
So it’s worth paying for the best lawyer and surveyor as well as paying the freeholder’s reasonable costs.
If you don’t, the freeholder is free to amend the contract to benefit them. They could, for example, include ground rent increases every 5 years. If you had chosen the formal route, your ground rent is likely to be reduced to nothing (known as a peppercorn rent).
The freeholder might also try to only grant you a small extension, which increases your term to 99 or 125 years. If you had chosen the statutory route you will get your existing term plus 90 years. This could be a huge difference in the length of your lease.
Another benefit of using the proper formal process is increased protection. For example, if there are any disagreements then you can take your case to a property tribunal. The process also has time limits built-in, so your freeholder can’t drag their feet.
How the lease extension process works
#1 Inform the freeholder
You’ll need to inform the freehold that you wish to extend the lease and will be pursuing the statutory route.
#2 Appointing a solicitor
Next, you will need to appoint a solicitor who has expertise with lease extensions. They’ll need to be a member of the Association of Lease Extension Practitioners (ALEP). As with buying any service, ensure you get at least 3 quotes.
#3 Valuation surveyor
With a solicitor in place, you’ll need to hire a valuation surveyor with expertise in leasehold extension legislation. Ideally, you’d find a firm who operate within your local property market as they will be up to date on current values in the area.
#4 Formal offer
You will have to serve a Section 42 Notice (also known as a Tenant’s Notice). It’s likely your solicitor will take care of this.
#5 (If required) pay a deposit
The landlord might ask you for a deposit which is typically either be £250, or 10% of the lease cost in the tenants’ notice, should this amount exceed £250. If a deposit is required , you have 14 days to do so. It’s therefore important to have this money readily available.
#6 Negotiate a price and basic terms
Working with your solicitor, they will advise you and help you to start negotiating a price and contract. Once a price is agreed, you’ll either need to use saving or remortage to pay for the lease extension.
What happens if you can’t agree?
It’s likely your freeholder will want to negotiate and so will probably reject your opening offer. Your solicitor will be able to advise on your best route to agree on a deal.
If after some negotiating you can’t reach an agreement, then you can apply to the First-Tier Tribunal (Property Chamber). It’s quite uncommon for cases to reach the tribunal as they can be time-consuming and expensive. So you should see this option as the last result.
How long does it take to extend my lease?
As the process involves multiple parties, it can drag on. If you have an efficient team, you might be able to agree a lease extension in 3 months. However, if one or more elements are slow to react, it could take anywhere up to 12 months.
It’s therefore critical that you only work with professionals who are efficient and then actively manage them with weekly calls or emails.
Should I try to buy the freehold instead?
While buying your freehold may sound easier and be more attractive, it can be just as complex as extending a lease. If you live in a house, you might find it easier to buy the freehold, than if you live in an apartment block, for example.
In either case, you have to get over half the leaseholders to agree for you to able to purchase the freehold. This could be difficult if you live in an apartment block.
If you would like some more advice, it’s well worth talking to the Leasehold Advisory Service who offer free advice on all aspects of leasehold law, including service charges, extending your lease, buying the freehold, right to manage and applying to the First-Tier Tribunal.
The Government’s Leasehold site is also highly useful.