If you own a house or flat, and it is based on ‘leasehold’ rather than ‘freehold’, then you are not alone. According to government figures, in 2019-20, there were an estimated 4.6 million leasehold dwellings in England, equating to 19% of the English housing stock. And if like many others you were thinking about extending your lease you probably have lots of questions. In this article we are going to explore everything around extending your lease. From the benefits, how you go about doing it, all the way through to the costs.
Topics to be answered in this article
What does Freehold and Leasehold mean?
If you own the freehold to a property, it means you own both the building and the land it is built on. Leasehold means that whilst you may own the building, someone else owns the land (the freeholder). Normally the leaseholder will pay ground rent to the freeholder.
Leasehold is often found where there are multiple dwellings sharing the same land, for example flats. The leasehold is usually over a longer period of time, 90 years, 120 years and even 999 years, however it can be as low as 40 years. As time passes the period of the remaining leasehold reduces and this can impact the value of the building that a leaseholder owns. The good news is that the law allows for the leasehold period to be extended in many circumstances.
What are the benefits of extending a lease?
The Leasehold Reform, Housing and Urban Development Act 1993 (“LRHUDA Act 1993”) provides leaseholders with the right to extend their lease term. There are a few good reasons why you should consider extending your lease sooner rather than later.
Increase the value of your property: As the term of your lease gets shorter, the value of your property will decline. Extending the lease will help mitigate this.
Avoid paying more in the future: If your lease has less than 80 years left to run, a “marriage value” (an additional premium payable to the landlord) applies which means that it is more expensive to extend the lease.
Make the property more marketable: If you are considering selling your property or considering re-mortgaging, it is worth noting that most properties that have a lease of less than 70 years will attract a higher mortgage rate. Most lenders rarely consider a lease that has less than 60 years to run which may make your property difficult to sell to buyers needing a mortgage.
Even if you don’t carry out the process yourself, as long as you meet the below criteria and serve a notice for a formal lease extension, you will be able to assign (transfer) the rights to a lease renewal to your potential buyer.
How do you go about extending a lease?
There are two ways to approach a lease extension:
Informal
You can approach the Landlord and agree between yourselves the terms of a lease extension. As it does not follow the statutory procedure, an informal lease extension will not be subject to the criteria and requirements under the LRHUDA Act 1993.
This means the negotiations between you are not governed by the statutory time limits which could mean that the Landlord may be able to delay your request and prolong any negotiations, potentially costing you more time and money than if you had made a formal claim.
It is unusual for a landlord to agree to reduce the ground rent to a peppercorn (nil) via this route and in most cases they will either try to retain the ground rent or increase it.
Formal
As soon as you have served your initial notice on the Landlord (the section 42 notice) your rights are protected in accordance with the LRHUDA Act 1993. You will be entitled to a new lease (1) for a term of 90 years (plus the remainder of the term of the existing lease); (2) at a peppercorn rent (i.e. cancelling ground rent if there is any in the existing lease); and (3) on the same terms as the existing lease.
The advantages of going through the formal route are as follows:
- Reducing any ground rent to a peppercorn (nil)
- A strict timetable will be followed by you and the Landlord once the section 42 notice has been served
- Your interests will be safeguarded under the statutory notice
- If you are wishing to sell your property when the term is at the borderline of being deemed a short lease, you are able to transfer your right to bring a claim to the purchaser
- More control for the parties to encourage expediency because there are sanctions for non-compliance.
It is very important to make sure your notice is correct and not invalid, otherwise you may be prevented from applying for a lease extension for 12 months.
What are the qualifying criteria?
To proceed with the formal route, you must meet the qualifying criteria;
- The property must be held under a long lease, i.e. more than 21 years.
- You must have owned the property for at least 2 years (please note that in the case of a shared ownership lease, the statutory time does not start until you staircase your ownership to 100%, i.e. staircase to 100% in 2016, then wait until 2018 before you can start the formal lease extension process, however you may be able to agree informally)
- The landlord is not a charitable housing trust.
- The lease is not a business tenancy.
How long does it take?
The timescales depend on which route you choose and ultimately how organised and efficient all parties are, including the Landlord and their chosen legal representatives.
The timeframe for completing a lease extension can range from between 3 – 12 months.
Leasehold Reform
The outcome of the Leasehold Reform (and Ground Rent) Bill is in the process of becoming legislation. There are some key points arising from what we know so far;
- It will still be possible to extend a lease via the informal route but the Reform does not change the fact that the Landlord can still charge a ground rent. However, the ground rent cannot be charged in relation to the extended period of the lease, it will stop being payable once the original lease term expires, and the ground rent charged cannot be increased to more than what is already stated in the current lease.
- There might be changes made to the cost of extending the lease i.e. the premium payable to the Landlord, and how it is calculated. It has been suggested that this new legislation could be put in place by the time of the next General Election in May 2024.
Instructing a Chartered Surveyor to provide a valuation
For any section 42 notice to be valid, your proposed premium for the lease extension must be realistic. This is why it is important to appoint a surveyor to value the premium payable to the Landlord for the extension. We recommend that you speak to a local surveyor who has dealt with valuing lease extensions within the area of your property. They may be dealing with other properties within your development which may mean they can offer you a discount.
If you do not appoint your own surveyor, you would only have the Landlord’s surveyor’s valuation which would not be in your best interests.
What are the costs to extend a lease?
You will be responsible for the Landlord’s legal and valuation costs, as well as your own. Once the notice has been served, you will also need to ensure you have a 10% deposit of the premium amount readily available.
Your solicitor should be able to give you an estimate based on your exact circumstances, however given the huge financial benefit of a longer lease, the cost is usually very easy to justify.
How can Goughs help?
The procedure of extending a lease can be complicated and detailed. There are many preparatory steps to take before approaching your Landlord on an informal basis or serving a formal section 42 notice. Goughs have a team of proactive and experienced property solicitors that can assist you with extending your lease. Please get in touch so we can understand more about your lease and how we can help you. We look forward to hearing from you.
