Are you worried about the ins and outs of extending your lease? You’re not alone. Property lease extensions often cause unnecessary confusion and uncertainty amongst leaseholders.
However, understanding when and why to extend a lease, the costs involved, and the legal processes required can help alleviate some of those concerns.
In this guide, we’ll cover everything you need to know about the concept of lease extensions for properties in the UK. By the end, you’ll be able to deal with lease extensions confidently as if they were ordinary bills.
Let’s get started with the most important question…
When should I extend my lease?
Generally, the best time and widely held belief to consider a lease extension is before the remaining term falls below 80 years. This benchmark is essential due to a legal concept known as “marriage value.” Once a lease drops below 80 years, the cost of extending can significantly increase, as the freeholder is entitled to a share of the property’s increased value resulting from the extension.
However, the decision to extend should also be based on your circumstances. For example, if you plan to sell the property soon, extending the lease will make the property more appealing and increase its value. For those intending to hold onto their property long-term, extending earlier will work out better financially as you can avoid the increased costs associated with shorter leases.
Why do I need to extend my lease?
There are a few reasons why you need to extend your lease. Consider the following…
Firstly, a lease is a diminishing asset; as the lease term decreases, the property’s value also decreases. This reduction in value becomes more apparent as the lease approaches the critical 80-year threshold. Therefore, extending the lease maintains the property’s market value and makes it more appealing.
Secondly, properties with shorter leases (typically under 60 years) can be challenging to sell or mortgage. Buyers and mortgage lenders generally prefer longer leases, which means sellers who obtain an extension can ensure their buyer pool isn’t limited.
How it works?
Extending a lease will involve negotiating with the freeholder (the landlord who owns the property’s freehold). Leaseholders have a legal right to extend their lease by 90 years on a flat and 50 years on a house, provided they meet certain criteria, such as owning the property for at least two years. This process, known as a statutory lease extension, also reduces the ground rent to a peppercorn rate (effectively zero).
However, leaseholders can negotiate directly with the freeholder for a mutually agreeable extension term and cost. This is known as an informal lease extension and can sometimes result in more favourable terms.
Who can extend their lease?
In the UK, the right to extend a property lease is only sometimes available to some leaseholders. Specific eligibility criteria must be met to qualify for a lease extension. The primary requirements are as follows:
- Qualifying Property
The lease must be for a flat or a house. Commercial properties, or properties with significant commercial use, might not qualify for the standard lease extension process.
- Long Lease
Initially, the lease should have been granted for more than 21 years. Short-term leases, such as rental agreements, do not 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 much will it cost to extend your lease?
The cost of extending a lease in the UK can vary based on several factors. However, the most significant factors determining the price are the property’s value, the length of the remaining lease, and the ground rent. Here’s a breakdown of the essential costs involved:
Premium for the Lease Extension
This is the main cost and is paid to the freeholder. It’s calculated based on the increase in the property’s value due to the extended lease. The shorter the lease, the higher the cost, especially once it falls below 80 years. For example, on a flat worth £200,000, a 90-year lease length will cost £4,500, while a 60-year lease length will cost £28,000.
Leaseholders must hire a solicitor for legal work and a surveyor for a valuation. These professionals charge fees for their services. You should expect to budget around £4000 for this.
Freeholder’s Legal and Valuation Costs
In addition to your own, you’ll likely cover the freeholder’s reasonable legal and valuation costs.
These may include Land Registry fees, stamp duty (if applicable), and any specific negotiation costs.
A guide to extending your lease
There are a few steps required to extend your lease. Here’s a step-by-step guide:
First, confirm that you meet the eligibility criteria for extending your lease, including the length of ownership and the original term of the lease.
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
- Remaining lease length
- Ground rent.
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.
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.
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).
If the freeholder proposes different terms, there will be a negotiation phase, typically involving both parties’ surveyors and solicitors.
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, and registering it with the Land Registry.
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.
Valuation for Leasehold Extension
The valuation stage is one of the more critical parts of the lease extension process. It supports negotiating the premium to be paid to the freeholder. Here’s how the valuation for a leasehold extension typically works:
Determining the Property’s Value
The first step is determining the property’s current value with its existing lease. This figure will be used to work out the baseline cost.
Calculating the Lease Extension Cost
The primary factors impacting this cost are:
- The Lease Length
The shorter the remaining lease, the more expensive the extension. Once a lease falls below 80 years, the cost increases more sharply due to the addition of ‘marriage value’.
- Ground Rent
The higher the ground rent, the more expensive the extension, as the freeholder is paid back for
the loss of this income.
- Property Value
Higher property values will result in higher lease extension costs.
- Marriage Value
This concept applies when a lease has less than 80 years remaining. It represents the additional value added to the property by extending the lease, and the freeholder is entitled to 50% of this added value.
The initial valuation is a starting point. Negotiations between the leaseholder and freeholder may influence the final agreed price, often mediated by their respective surveyors and solicitors.
Professional Valuation Services
Given the complexity of the process, it’s wise to have a professional surveyor specialising in leasehold extension valuations. They will provide a more accurate and legally sound valuation, essential for negotiations.
A well-conducted valuation informs the leaseholder of the potential cost. It strengthens their negotiation position, ensuring a fair and reasonable extension deal.
How a lease extension is calculated
There are five main components for how lease extensions are calculated they are:
- Compensation for loss of ground rent
The freeholder is compensated for the loss of ground rent income over the remaining term of the existing lease. This will involve calculating the present value of the future ground rent, discounted to account for its being paid upfront.
- Reversionary value
This is the figure for the freeholder’s right to take back possession of the property at the end of the lease term. The shorter the remaining lease, the higher the reversionary value, as the freeholder’s right to reclaim the property is closer in time.
- Marriage value
This is only required when the lease has fewer than 80 years remaining; marriage value increases the property’s value due to the lease extension. The freeholder is entitled to 50% of this increase. The marriage value is calculated by comparing the property’s value with the current lease and the value with the extended lease.
- Capitalisation of ground rent
This involves converting the ground rent into a lump sum present value. The calculation considers the annual ground rent amount, the duration of the remaining lease, and a discount rate.
- Discount rate
This calculates the present value of future payments, reflecting the time value of money. The choice of discount rate can significantly impact the valuation.
While these five are essential, negotiation skills are the most significant driver behind the value. Nothing is absolute, and if market conditions are right, you can negotiate a better deal.
Leasehold extensions can be expensive, so it’s always a good idea to have help from solicitors and other professionals. Additionally, leaving plenty of time to get the extension will help prevent further costs. However, if you find yourself in the situation of trying to sell without having a lease extension and, as a result, struggling to find buyers, we can help. Here at Sold.co.uk, we get properties sold – no matter what the situation. If you need to sell a house fast, get in touch to find out how we can help.
At what point should you extend a lease?
It would help if you started considering a lease extension when the remaining term is around 90 years. Ideally, you want to have things in place before they fall below 80 years, as this is when the cost of extending starts to increase significantly due to the addition of ‘marriage value’.
Should I renew my lease now or wait?
If your lease is approaching 80 years, extending it sooner rather than later is better to avoid additional costs. If you plan to sell the property, a longer lease will make your property much more appealing to potential buyers.
Is a 125-year lease long enough?
A 125-year lease is a good length and should be fine regarding property value and getting the property sold for many years.
What are the disadvantages of extending a lease?
The main disadvantage is the cost involved, including the premium paid to the freeholder and associated legal and professional fees. Beyond the upfront costs required, the process can be time-consuming and will need negotiation with the freeholder.
What are the government policy changes for leasehold properties?
There are expectations that the entire leasehold system will be overhauled soon. While nothing specific has materialised at the time of writing, there are plenty of ongoing discussions, with one new proposed measure being that a cap on ground rent will be introduced. This will limit freeholders to only being able to charge 0.1% of the value of a property. However, keep your eyes on leasehold and freehold reform bill updates to stay informed.