Living in a leasehold property is different to living in a freehold one.
It involves a written lease agreement, which comes with its own pros and cons.
Extending your lease is one of the things you may have to do if you have lived in a flat or maisonette for long enough.
However, knowing when the right time is to do this can be a challenge.
Here’s a guide for all asking: when should you extend your lease?
What is extending a lease?
The United Kingdom has two types of property ownership: leasehold and freehold.
Most flats and maisonettes are leasehold. These come with a ‘lease agreement’ which lasts for several years.
Once this period expires, the property automatically transfers to your freeholder. You retain ownership by extending your lease.
Most leases can be extended for up to 999 years. Generally, anything below 80 years is a ‘short lease’.
You can extend the length of your lease to allow you to live there longer.
This involves a payment and a contract signed with your freeholder.
Reasons you need to extend your lease
Keep your property value up
Properties with a longer lease are more valuable. Your house value will decrease once it drops below a certain point.
If you want to sell for the highest amount possible, extending your lease helps.
Ensure you can sell it on the open market
Lenders will only offer a mortgage on a leasehold that’s got a lease longer than 80 years.
So, keeping the lease above this length ensures you can sell it to a typical buyer.
Otherwise, only cash buyers will be applicable, and they’ll expect a reduced price.
Avoid losing the property altogether
If the lease length drops to zero, your property automatically goes to your freeholder.
You’ll no longer own it. Extending the lease prevents this from happening.
When do lenders stop offering mortgages on a leasehold property?
Almost all lenders won’t offer a mortgage when the lease drops below 70 years.
And lots of lenders are stricter, stopping lending once it goes below 80 years.
Each lender has their own threshold. You should ask them if you’re unsure.
Being proactive about extending the lease is thus crucial, especially if you’re selling to someone using a mortgage.
When should you extend your lease?
Most experts agree you should extend your lease before it drops below 80 years.
Once it goes below this, mortgage lenders may refuse to offer on your house. The cost of extending your lease goes up significantly at this point.
You should also consider your circumstances when deciding when to extend.
For example, extending the lease will increase its value if you plan to sell soon.
For those intending to hold onto their property long-term, extending earlier will work out better financially.
What are the requirements to extend a lease?
Qualifying property
The lease must be for a flat or a house.
Commercial properties, or properties with significant commercial use, often don’t qualify.
Initial lease for longer than 21 years
Initially, the lease should have been granted for more than 21 years.
Short-term leases, such as rental agreements, don’t qualify for extensions.
Ownership duration
The leaseholder must have owned the property for at least two years before applying for an extension.
This period is calculated from the date of registration at the Land Registry, not the purchase date.
No major breaches
Leaseholders who have significantly breached the terms of their lease (e.g. by not paying ground rent) may need help extending their leases.
These criteria only apply to statutory lease extensions.
Leaseholders can always attempt to negotiate an informal lease extension with their freeholder, regardless of these conditions.
How to extend your lease
1. Eligibility check
First, confirm that you meet the eligibility criteria for extending your lease, including:
- The length of ownership
- The original term of the lease.
2. Professional valuation
Hire a chartered surveyor with experience in leasehold extension valuations.
This professional will estimate how much your lease extension should cost.
They will take into account the critical factors of the property’s value. They’ll also look at the remaining lease length and ground rent.
3. Legal advice
You should then request the expertise of a solicitor specialising in leasehold property.
They will guide you through the legal issues and handle the necessary paperwork.
4. Serve a Section 42 notice
This legal notice informs the freeholder of your intention to extend the lease and your proposed terms, including the price.
Your solicitor will usually help draft and serve this notice.
5. Freeholder’s counter-notice
The freeholder has two months to respond with a counter-notice.
They can accept your terms, propose different terms, or reject your claim. The latter is rare and must be legally justified.
6. Negotiations
If the freeholder proposes different terms, there will be a negotiation phase.
This typically involves both parties’ surveyors and solicitors.
7. Agreement and completion
Once terms are agreed upon, your solicitor will finalise the deal.
This includes:
- Drafting the new lease
- Signing it by all parties
- Registering it with the Land Registry.
8. Dealing with disputes
If an agreement isn’t reached, either party can apply to the First-tier Tribunal (Property Chamber) to determine the terms.
However, this is usually a last resort due to additional costs and time involved.
How long does it take to extend your lease?
It usually takes at least three months. And on the slow end, it can take up to twelve months. Six months is about average.
You’ll often need a solicitor to help you complete the paperwork.
According to the Leasehold Reform, Housing & Urban Development Act 1993, this involves complying with specific timelines.
Does extending a lease give a return on investment?
You should ask an independent valuer to advise on how much it’ll improve your property value.
Then, calculate the expected costs. You need to earn more money on it than you pay out.
Just beware that your freeholder will want a cut of the profits. Often, this is around 50%.
Make sure to clarify all these numbers to work out your return.
