Thinking about extending your lease? Here are some points to consider:
How long is your lease?
Your lease is a wasting asset and as the length of the lease decreases, so does its value.
Leaseholders should avoid letting the term of their lease fall below 80 years. It is normally advisable to extend before your lease reaches this limit.
If a leaseholder allows the lease term to fall below 80 years, there could be significant costs involved in extending the lease term. The potential premium payable could be significantly higher due to an additional valuation element called the ‘Marriage Value’.
Further, if you were looking to sell your property, this may also become an issue for potential buyers who would be buying with the aid of a mortgage. Banks and building societies differ in their lending criteria: some draw the line at 75 years remaining on the lease; others may be happy with anything over 70; below 60 years, it may be difficult to get a mortgage at all.
How do you extend your lease?
When considering how to proceed with extending your lease, a leaseholder has two options available. You can either extend formally (providing you qualify), or informally.
Informal – the pros & cons
The informal process includes entering into negotiations with the freeholder to come to a mutual arrangement over the terms of the new lease. Simply by contacting the freeholder, a leaseholder may be able to reach agreement as to the terms of the new lease to include: the premium; length of the extended term; any future ground rent payable (if any) etc.
There are a number of advantages to proceeding with the informal route, and in some instances, this may be the only option available to some leaseholders if they do not qualify for the formal route.
Advantages include:
- Costs, as the legal costs are often lower.
- Less statutory control over what terms are to be agreed as part of the process. As an example, if you are interested in adding a shorter period to your lease to perhaps ‘top up’ the amount of years remaining, then the informal route affords a great degree of flexibility and control, compared to the formal process, where you can only obtain a full 90 years on top of your current unexpired term.
- No time limits, so the process can normally be completed within a much shorter time period compared to the formal statutory procedure.
Disadvantages include:
- There is less certainty, as either party can seek to change the terms, or pull out of the agreement at any time
- There is no time limit for the process. The landlord is under no obligation to complete the process in any period, or adhere to any initially agreed premium.
- You may find that your landlord seeks to impose a revised ground rent, which would be capped at a peppercorn under the formal process
- The landlord can take the position that he insists on your paying his legal and valuation fees, as well as your own. There is no obligation for him to refund these or your own costs should he withdraw from negotiations at any time.
- You will have no access to the Leasehold Valuation Tribunal which, under the formal route, can compel the landlord to adhere to a timetable, accept a reasonable offer and keep their professional fees at a reasonable level.
- The lack of a fixed date is hazardous where the lease is approaching the 80-year mark, as the landlord might demand a higher premium when the lease falls below 80 years, and could even string out the process to do so.
In the event that informal negotiations for a lease extension become protracted, then a leaseholder is not prevented from pursuing the lease extension formally, providing they qualify to do so but time and money will already have been spent, to no avail.
Formal – the pros & cons
The formal process is governed by The Leasehold Reform Housing and Urban Development Act 1993 (the ‘1993 Act’). This introduced a statutory right, allowing leasehold owners to extend the lease of their property upon the payment of a premium to the landlord calculated under statutory formula.
In order to qualify for a lease extension under the 1993 Act, you must be a long leaseholder. This means that the lease when originally granted must have been for a term of more than 21 years.
Previously, to extend a lease, it was also a requirement that the leaseholder must have occupied the property in question for a period of two years. This has now been replaced with the requirement that the leaseholder must have owned the property for two years. It is therefore important to take this into consideration if you are looking to buy a property with a lease term approaching the 80-year mark. Either you will need to purchase, then wait two years to commence the process, or you could negotiate that the seller commences the process and assigns the benefit of this to you.
Advantages include:
- You are guaranteed (providing you qualify) to obtain a 90-year term of the lease.
- Any ground rent payable under the existing lease is reduced to a peppercorn (zero).
- The terms of the new lease are governed by the 1993 Act and so the leaseholder can seek to exclude any unreasonable terms
Disadvantages include:
- It can take time to complete the formal process from start to finish, as the statutory timeframes are generous
- The costs payable by the leaseholder tend to be higher than with the informal route, as they include the costs of service of statutory notices for both parties’ solicitors.
Will I need a valuer?
We would always recommend that you have a formal valuation from a valuer specialising in this field. Even for negotiations, you need to have an idea on how much you are likely to pay. In addition, using the formal route, it is necessary to specify a price in the initial notice. If the price is unrealistic, this could lead to your notice being declared invalid or result in litigation to determine the appropriate premium which could be costly.
What if I want to sell?
If you are in the process of selling your property, it is possible to commence the process under the formal route by serving an initial notice, then assign the benefit of the notice to your buyer by executing a deed. This way, the extension process can be continued post-completion, even though the new owner has not owned the lease for two years. This is a particularly attractive solution where the lease is approaching the 80-year mark.
To proceed otherwise would mean the new owner having to wait two years before they can compel the landlord to grant an extension and, in the meantime, the potential premium increases and could be significantly inflated by the marriage value if the term drops below 80 years.
Next Steps?
The best course of action will depend on your circumstances, particularly the length of your lease and the urgency for a lease extension to complete.
If you are considering extending your lease, then please speak to us before you approach your landlord.