How To Extend A Leasehold

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Owning a leasehold property often entails the eventual need to extend the lease. Over time, the lease term diminishes, which can adversely affect the property’s value and marketability. As such, extending the lease becomes a crucial consideration for leasehold property owners.

The process of extending a lease can be intricate and multifaceted. It involves navigating legal complexities and negotiating terms with the freeholder. However, understanding the key aspects of lease extension is essential for leasehold property owners to protect their investment and maintain property value.

This comprehensive guide offers valuable insights into the lease extension process, empowering leasehold property owners with the knowledge needed to navigate this important aspect of property ownership.

The difference between leasehold and freehold

In buying a freehold property, like a house, you gain ownership of both the property and the land it sits on without any time constraints.

On the contrary, purchasing a leasehold property grants you the right to reside in the property for the duration specified in the lease. However, you don’t own the property or the land, as they remain under the ownership of the freeholder.

The majority of leasehold properties, particularly flats, involve ownership of the property within a larger building, with the building and land owned by a freeholder.

Can you extend a lease?

If you’ve held your leasehold property for a minimum of two years, and the lease had at least 21 years remaining when you bought it, you’re eligible to extend it under statutory law.

How Can I Extend My Lease?

When considering extending your property’s lease, you have two primary avenues to explore.

The formal route, also termed the statutory route, involves the leaseholder issuing a statutory notice to the freeholder, expressing their intent to extend the lease by 90 years and cease ground rent payments. Negotiations ensue regarding the cost, culminating in a mutual agreement between both parties.

Conversely, the informal route entails direct negotiations between the leaseholder and freeholder, without the issuance of a statutory notice. While the lease can potentially be extended up to 999 years, the freeholder retains discretion over charges, including the possibility of escalating ground rent over the lease term.

Although the formal statutory route may entail a lengthier process, it offers a safer recourse. Opting for the informal route carries inherent risks, including uncertain outcomes and potentially inflated costs, with freeholders often granting only short lease extensions, necessitating future extensions and additional expenses.

For assured security and tranquility throughout the lease extension process, engaging a solicitor well-versed in this domain is advisable.

Crucially, if your property’s lease falls below the 80-year threshold, you possess the legal entitlement to extend it, safeguarding your property’s long-term viability and value.

Process for lease extension

To initiate a lease extension via the statutory route, follow these steps:

Verify your eligibility: Ensure you’ve owned the leasehold for at least two years before proceeding.
Notify the freeholder: Inform them of your intention to pursue a lease extension through the statutory route.
Retain a specialised solicitor: Choose a solicitor well-versed in lease extensions, preferably affiliated with the Association of Lease Extension Practitioners (ALEP).
Obtain a comprehensive property valuation: Engage a valuer, either recommended by your solicitor or sourced independently via ALEP, to assess the property’s value. This valuation will serve as the basis for negotiations with the freeholder.
Serve the section 42 notice: Your solicitor will draft and deliver this notice to the freeholder, outlining your proposed lease extension offer based on the valuation.
Provide the deposit: Submit a deposit, equivalent to 10% of your valuation offer or £250, whichever is higher, to the freeholder.
Review the freeholder’s response: The freeholder may accept or reject your initial offer, potentially presenting a counteroffer. Your valuer can engage in negotiations until a mutually acceptable agreement is reached.
Consider legal recourse: If negotiations stall, you have the option to seek resolution through a First-tier Tribunal. However, be mindful of the associated costs for both parties.

Why would you extend your lease?

A lease below 80 years is considered short and can complicate property sales or remortgaging, impacting home value.

Approaching the 90-year mark prompts urgency in extending the lease, as costs increase closer to the 80-year threshold.

When should you extend a lease?

If your property’s lease is nearing or below 80 years, it’s advisable to consider extending it.

Properties with shorter leases typically face diminished market value, posing challenges in selling and increasing the cost of lease extension.

Moreover, securing a mortgage or refinancing becomes challenging with a short lease, complicating property transactions.

When a lease drops below 80 years, the freeholder can claim ‘marriage value’, entitling them to 50% of the property’s value increment post-extension.

Can a landlord refuse to extend a lease?

If you’ve owned the property for at least two years, your landlord can’t deny your request to extend the lease.

Residency in the property isn’t mandatory, but you must be the registered owner according to the Land Registry.

Statutory lease extensions dictate that the lease terms must remain unchanged.

How much does it cost to extend a lease?

The price of extending a lease hinges on several factors:

Property value
Remaining lease duration
Ground rent
Leaseholder’s improvements

Costs vary widely, spanning from a few thousand pounds to approximately £100,000, dictated by these variables.

You’ll also need to factor in a range of other costs, including:

Legal and Land Registry fees

Lease extensions involve legal intricacies, necessitating the engagement of a solicitor for proper handling. Additionally, registering the new lease with the Land Registry incurs a fee.

Valuation fees:

When extending a lease, you’ll need to have a new valuation carried out on your property, conducted by a qualified surveyor.

Stamp duty:

In most cases, stamp duty is not payable for lease extensions. However, if extending the lease costs more than £125,000 or you’re extending the lease on a second home, stamp duty may apply.

The freeholder’s costs:

By law, you’re required to pay your freeholder’s legal and valuation costs if you wish to extend your lease.

How long does it take to get a lease extension?

Lease extensions typically span from three months to a year, varying based on the complexity of negotiations and the timeline involved.

What is a section 42 notice?

A section 42 notice, also known as a tenant’s notice, initiates the legal process for extending the lease. Upon serving this notice to the freeholder, you become responsible for covering their legal expenses, within reason. Additionally, it establishes the valuation date, ensuring that any changes affecting the extension cost post-notice are not considered.

Accuracy is crucial when drafting the tenant’s notice to prevent rejection and subsequent delays or expenses in the extension process. This notice should provide comprehensive details about you, your property, the lease terms, extension proposals, and the deadline for the freeholder’s response.