Is It Better To Extend Lease or Buy Freehold?

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If you’re a leaseholder facing a dwindling lease or steep ground rent, you might be exploring your options to address these issues.

Under the Leasehold Reform Housing and Urban Development Act 1993, you have two primary rights that can provide you with a lengthy lease term and eliminate ground rent obligations. This article provides an in-depth look at both options.

The first option is Collective Enfranchisement, where you and your fellow leaseholders purchase the freehold of your building. This allows you to collectively manage the property and extend your leases. While we do not currently offer this service, consider exploring options like The Freehold Collective.

Alternatively, you can opt for a Statutory Lease Extension, which not only extends your lease but also eliminates ground rent payments. This route is generally simpler, more cost-effective, and requires less coordination.

Advantages and disadvantages of purchasing the Freehold

Buying the freehold of your building, also known as Collective Enfranchisement, can be an advantageous move in principle.

It’s important to note that not all buildings are eligible for freehold purchase. Exclusions may apply to buildings owned by housing associations or councils, those with commercial portions, or properties not let on long leases.

If your building qualifies and the process suits your needs, it can deliver significant benefits. For instance, I once owned a first-floor flat in a two-flat building where we collectively purchased the freehold. Subsequently, we extended both leases, eliminated ground rent payments, and reduced maintenance and insurance costs.

However, owning the freehold comes with its challenges and considerations.

Buying your freehold. The pros:

Making Smarter Maintenance Decisions: Instead of being subjected to maintenance costs like replacing a roof imposed by an external party, you can collaborate with your neighbours to schedule the work and choose the best service provider.

Reduced Insurance Expenses: Acquiring the freehold often leads to lower insurance costs because you have the flexibility to seek out the most competitive rates available.

Genuine Ownership: Owning the freehold gives you a sense of true ownership over your flat and a vested interest in the entire building.

Extended Lease: Once you’ve purchased the freehold, you have the option to extend your lease term.

Increased Property Value: Typically, flats that include a share of freehold tend to hold slightly higher market value compared to those without.

Buying your freehold. The cons:

Involving Your Neighbours: If you live in a block of flats and want to buy the freehold, you’ll need to coordinate with your neighbours. Getting at least half of them onboard can be a challenging and time-consuming process.

Loss of Building Safety Act Protection: If you qualify for protection under the Building Safety Act 2022 due to building defects, you may lose this protection if you collectively enfranchise.

Costs for Non-Participants: Some neighbours may opt out of buying the freehold. In such cases, you’ll need to cover their share, hoping to recover the costs when they extend their lease in the future.

Dividing Costs Fairly: When purchasing the freehold, contributions aren’t always equal. For instance, a leaseholder with a shorter lease might pay significantly more than one with a longer lease and no ground rent.

Potential Contentious Issues: Buying the freehold can lead to disputes. Freeholders may inflate costs by claiming the building has development potential, making negotiations challenging.

Living in a Democracy: While removing the freeholder might seem beneficial, decision-making becomes communal. Collaboration with neighbours on important decisions, including financial ones, can be complex.

Estate Management Charges: Even after buying the freehold, some properties may still incur estate management charges, typically seen in new build estates.

Advantages and disadvantages of extending your lease

Extending your lease allows you to maintain your status as a long-term tenant in your property while enhancing your situation in meaningful ways. By extending the lease, you secure a longer period of tenure, providing stability and continuity in your residence. This process not only ensures your continued occupancy but also increases the value and marketability of your property. Moreover, it allows you to enjoy the benefits of property ownership for an extended period without the uncertainties that come with a shorter lease term.

Lease extension. The pros:

Extending your lease can significantly boost your property’s value, enhancing its market worth beyond its current appraisal.

You’re entitled to extend your lease by an additional 90 years, providing long-term security and investment potential.

With a lease extension, you eliminate ground rent payments altogether, reducing your ongoing expenses.

Unlike collective enfranchisement, extending your lease allows you to proceed independently without coordinating with neighbours.

Compared to purchasing the freehold, extending your lease typically incurs lower costs, making it a more economical option.

By extending your lease, you avoid the complexities of managing communal aspects of the building, offering greater convenience.

Opting for a lease extension now could make your future share in a freehold purchase more affordable, ensuring long-term financial benefits.

Lease extension. The cons:

Your property will remain leasehold, preserving its existing tenure status.

You’ll continue to interact with a freeholder, responsible for managing charges such as maintenance, permissions, and insurance as stipulated in your lease.

All restrictions outlined in your original lease agreement will continue to apply.

Both extending your lease or purchasing the freehold offer significant advantages over owning a property with a diminishing lease term.

Your lease extension rights

There are two methods to extend a lease. One option is to exercise your legal right after owning the property for two years, allowing you to add 90 years to a flat’s lease or 50 years to a house’s lease (additional criteria may apply – seek legal advice if needed).

The formal process begins by obtaining a property valuation and involves serving a ‘Tenant’s Notice’ on the freeholder, typically handled by you or your solicitor.

Alternatively, if you’ve lived there for less than two years, your only recourse is to negotiate informally with the landlord for a lease extension.

Negotiating the terms and cost of a lease extension can be intricate and time-intensive, hence seeking professional advice is advisable.

Costs of extending a lease

The cost of extending a lease varies based on several factors.

After holding a leasehold flat for two years, you can add 90 years to your lease at a peppercorn rent, eliminating ground rent. However, extending the lease requires paying the landlord a premium. If the lease has less than 80 years left, you might also face a marriage value charge.

The shorter the remaining lease on a flat, the higher the premium. The freeholder can demand a deposit of £250 or 10% of the proposed lease extension cost.

For houses, extending the lease does not involve a premium. Yet, the ground rent could increase under the ‘modern’ rent terms for the new 50-year lease.

You’ll incur costs for your own valuation and solicitor, plus the freeholder’s ‘reasonable’ expenses like their valuation and legal fees.

Concerns about increased extension costs due to property improvements are unfounded, as renovations by current or prior leaseholders are excluded from the lease extension calculation.

Right of first refusal

In a flat, if your freeholder intends to sell part or all of the freehold, they must first offer leaseholders the opportunity to purchase it. This is known as the right of first refusal.

Leaseholders have two months to accept the offer if the freeholder initiates this right. More than half of the eligible tenants must agree for the offer to proceed.

If leaseholders decline the right of first refusal, the freeholder can sell to a third party, provided the sale price isn’t lower than the one offered to leaseholders within 12 months.

Leasehold houses are exempt from the right of first refusal provision.