Lease Extensions

There are two main types of home ownership in England and Wales: Freehold and Leasehold. Find out more about these below.

Freehold

You own the building, the land on which it stands and the sky above it and are responsible for its maintenance. Houses are generally freehold.

Leasehold

You own the property for a period of time as specified in a lease agreement with the freeholder (person / company who owns the freehold). The freeholder, who may also be the Landlord, is responsible for the maintenance of the communal areas and you pay a service charge / ground rent. Flats and maisonettes are usually leasehold.

It may be the case that a leaseholder owns a leasehold flat and also owns a share of the freehold. This is usually where a company has been formed which owns the freehold interest. The owners of some or all of the flats within the building own a share in and are members of that company.

How can we help you?

When a leaseholder owns a leasehold property, they will have been granted or assigned a lease of the property for a specific period of time known as the ‘term’. The most common lease terms for residential properties are 99 years, 125 years, 250 years or 999 years, although other terms are possible.

Over time, the lease will decrease in length. Once a lease falls below a certain length, this can make the property less valuable. A lease extension will top-up the number of years on the lease by increasing the lease term, thereby making the property more valuable and more attractive to both buyers and lenders.

There are two ways of extending a lease:

1. The ‘formal’ statutory route

This is done under The Leasehold Reform, Housing and Urban Development Act 1993 (as amended) and requires a Notice known as a Section 42 Notice to be served on the Landlord (usually the freeholder). The process follows a prescribed route.  To be able to extend a lease, the leaseholder must be a ‘Qualifying Leaseholder’ which means that the leaseholder owns a long lease and has owned the property for at least two years. A long lease is one which, when originally created, was for more than 21 years. Provided a leaseholder has owned the property for two or more years he/she has the right to add an additional 90 years to the term remaining on the current lease at a “peppercorn” rent, which means that no ground rent will be payable when the lease extension has been completed.

2. The ‘informal route’

This involves the leaseholder approaching the Landlord to see whether the Landlord is willing to grant a lease extension and then negotiating with the Landlord with a view to agreeing the new lease term, the ground rent to be payable and the price to be paid for the lease extension. There are no rules governing this route and if both parties are not able to agree the terms of the lease extension the statutory route must be followed.

The Landlord is entitled to a ‘premium’ for granting the lease extension. This is the price which is to be paid by the leaseholder to the Landlord for the lease extension and is calculated based on a formula. There are certain variables within the formula which is why the premium being sought by the Landlord may be higher than the premium which you offer to pay.   We would advise you to instruct a surveyor to help you determine the premium to offer for your lease extension.

We can explain what is involved at every step of the process and provide guidance to help you decide your best course of action, based on your own individual circumstances.

The Section 42 Notice starts the statutory procedure by informing the Landlord of the leaseholder’s wish to extend the lease and the amount the leaseholder is willing to pay. The leaseholder will be liable for the Landlord’s reasonable costs from the date the Notice is received.

The Landlord must respond and serve a Counter Notice on the leaseholder no later than the “response date” which is a date no less than two months from service of the leaseholder’s Notice. This Counter Notice should specify whether the Landlord accepts or rejects the leaseholder’s proposals.

If the lease extension Notice is accepted, the Landlord may suggest different terms, such as a higher premium. If the lease extension is rejected, the Landlord must confirm the reason for the rejection to the leaseholder.

If terms cannot be agreed within a set time frame, the leaseholder may apply to the First Tier Tribunal for a decision.

The length of time a lease extension can take differs from case to case. It will depend on elements such as the route you choose to take and the level of cooperation from the various parties involved. For example, if both parties can agree all the terms of the new lease quickly, then the matter should be resolved within a fairly short period.

We do not want to raise false expectations by promising a precise time frame at the outset, as it is impossible to predict any issues that may arise. That said, we aim to deal with your matter as efficiently as possible and we will always bear in mind any particular time frame to which you might wish to work.

We pride ourselves on our honesty and will always let you know if we think your goals may not be achievable.

Costs vary according to specific circumstances such as the property itself and whether the parties proceed down the formal or informal route. We therefore advise you to contact us so that we may provide you with a specific tailor-made estimate of costs based on the information you provide to us.

The premium payable for a lease extension will depend on various factors including the number of years remaining on the existing lease. If there are less than 80 years remaining on the lease, the leaseholder will be required to pay to the Landlord what is known as a ‘marriage value’ as part of the premium. The marriage value is based on the amount of extra value that a lease extension would add to your property.

It is usually the case that the leaseholder will be liable for the Landlord’s legal costs and surveyor’s fees.

There will be other costs to be incurred including HM Land Registry’s fees for registration of the lease extension, and your own surveyor’s fees. Should an application to the Tribunal be required under the formal route, further costs will be incurred.

As the number of years left on a lease shortens, the value of the property decreases and it will be more difficult to sell the property. In addition, there could be difficulties in obtaining a mortgage. Whilst lenders have different requirements, typically lenders will not lend on properties where the lease has less than 75 years left to run. This will affect the ability to sell the property, especially if a buyer requires a mortgage.

If you are buying or selling a property that has a short lease, you may be able to negotiate a lease extension as part of the sale or purchase transaction (although a premium for the lease extension will have to be paid in addition to the purchase price). If buying, you will not be able to apply for a lease extension yourself until you have owned the property for at least two years. In these circumstances, the seller will either need to complete the lease extension prior to completion so that you purchase the property with the newly extended lease or serve the formal Notice on the Landlord prior to completion and then assign to you the right to benefit from the lease extension after completion (formal route). We can provide advice on these alternative options and the best way for you to proceed.

If you are seeking advice about an issue that is not shown above, we may still be able to help. Please call or email us to find out more.
+44 (0)20 8852 4433
enquiries@beverleymorris.co.uk

Lease Extensions Team

Angela Stanton

Head of Conveyancing
Blackheath Office
Email Angela

Rita Egan

Blackheath Office
Email Rita

Tony Stafford

Blackheath Office
Email Tony