So your lease is expiring, but what is the process for extending your lease?
Macauley Cubitt, residential property solicitor, answers commonly asked questions about the process.
The Leasehold Extension Process - Your Questions Answered
If you own a leasehold property (i.e. a flat or maisonette) you may be concerned that the term of your lease is expiring. Once you have owned the property for two years, you may benefit from a statutory right to extend your lease by 90 years (added on to the existing term) and reduce the ground rent to a ‘peppercorn’ meaning that no ground rent would be payable to your landlord or freeholder.
If you have not owned the property for two years or you are seeking to extend the term of your lease by more than ninety years and/or vary additional terms, you can enter into negotiations with your landlord/the freeholder. This is outside the scope of your statutory rights and the Landlord would likely charge you a premium for doing this, if they agree at all. This article does not go into detail on non-statutory lease extensions.
Why should I extend my lease?
There are numerous reasons why your lease should be extended:
- The value of your property will diminish as the term of your lease expires and conversely, the landlord will demand a higher fee for extending the term. Extending your lease is therefore a good way of increasing and maintaining the value of your property.
- Taking advantage of the right to reduce ground rent to a peppercorn can also save you money in the long term. Additionally, many leases include unfair provisions for escalating ground rent where it can increase, normally by doubling every set number of years. If your ground rent is above £250 per annum, your lease can be treated as an assured tenancy in which you have less protection and fewer rights.
- Although the requirements will differ from lender to lender, as a general rule, they will not consider a flat or maisonette with a short term to be adequate security. The majority of lenders therefore insist on a minimum unexpired lease term. If you are intending to sell your leasehold property you might consider extending your lease beforehand to make your property more marketable and accommodate more buyers who require mortgage finance.
When should I extend my lease?
As stated above, as the term of your lease diminishes, so does the value, marketability and pool of available lenders who will fund future buyers of your property. Your lease term should be extended whilst it remains above 80 years where possible. If you make an application to extend your lease where the residual term is under 80 years, the premium that you pay to the landlord or freeholder will increase. This is because the landlord will be entitled to include a charge on the marriage value, being the increase in the value of the property resulting from the extension.
Are there criteria for eligibility to extend a lease?
In order to qualify for a statutory lease extension, the following criteria must apply:
- You must have owned a leasehold property for two years at the minimum.
- The leasehold interest you own must be considered a ‘long lease’. This means that the original term should have been over 21 years when it was originally granted. This will be the case for the large majority of flats and maisonettes.
- The lease must not be for business or commerce.
- The lease must not have been granted in the course of charity where the landlord is a housing trust.
What is the process - do you need a solicitor?
The process of a statutory lease extension can be complicated and it is highly recommended that you seek legal advice by instructing a solicitor or conveyancer to represent you before you start the process. In addition to a solicitor/conveyancer you should also appoint a valuer, preferably one accredited by RICS. The valuer is necessary to confirm what premium is payable to the freeholder in return for granting an additional 90 years and reducing the ground rent (if applicable).
In order to start the process of extending your lease, your solicitor or conveyancer will serve what is known as a ‘section 42’ notice on the landlord or freeholder including this premium. The Landlord will have 21 days to request evidence that you have the right to extend your lease should they want to do so. The landlord can also request to inspect the property to carry out a valuation, but a minimum of three days notice must be given.
The landlord is obliged by statute to respond with a ‘section 45 counter notice’ by the date specified in your original section 42 notice. The counter notice will either:
- Agree to the request and the terms;
- Agree to the request but propose alternative terms; or
- Dispute the request.
Provided that an agreement is reached or the landlord agrees to the initial notice, it will then be down to your solicitor and the landlord’s solicitor to draft and agree on a new lease. If the notice is disputed it becomes a matter of negotiation; however If an agreement cannot be reached, you can apply to the Court (First Tier Tribunal) for an order. Court applications are costly and time consuming and generally speaking are best avoided unless absolutely necessary.
How long does it take?
The timeframe of a statutory lease extension can change according to a number of variables including the responsiveness of your valuer and solicitor. If the property is being sold, the seller can serve a section 42 notice and assign the benefit of this notice with the lease, effectively allowing their buyer to purchase the flat or maisonette without having to wait two years. Your solicitor will need to advise on this to ensure the timings are correct.
Is it expensive?
A statutory lease extension can be a costly exercise, though the final balance will depend on a number of variables. The premium that the freeholder/landlord is entitled to charge is based on a complicated formula, accounting for the value of the property, the remaining lease term, ground rent, improvements made to the property and more. You will be responsible for the landlord/freeholders reasonable legal and own valuation costs. This is in addition to your own legal fees, surveyor fees (for the valuation) and Land Registry costs.
The landlord is entitled to request a deposit, normally being £250 or 10% of the premium. If requested, this must be paid within 14 days.
What happens if you don't know who owns the freehold?
Your solicitor will be able to advise you on who the landlord is by applying to HM Land Registry for a copy of the freehold title. If the landlord is absent and cannot be tracked down, you are still able to extend your lease by applying to the county court for a vesting order.