What is the process of extending a lease?
Extending the lease on your property is a strategic decision that can protect and enhance the value of your investment. Although the process might initially appear challenging, there is a defined series of steps to follow, simplifying a lease extension into a manageable, step-by-step procedure.
What is a lease?
Most flats in England and Wales (and a small percentage of houses are leasehold) which is essentially a long-term rental agreement.
A lease is issued by a freeholder (landlord) for a fixed term - typically between 99 and 999 years. Once the lease term expires, the leaseholder loses the right to use the property, and ownership of the lease reverts to the freeholder.
The lease will cover areas like:
- the term (length) of the lease
- your rights of usage over the property and common areas
- Any restrictions over how you use the property e.g. whether you can keep pets at the property or use the property as a place of business
- any covenants such as a requirement to have carpets, i.e. no wooden floors
- whether you can alter the property and how to obtain consent for alterations
- details of ground rent payable and how it is reviewed
What is a lease extension?
A lease extension is a legal agreement between the leaseholder and the freeholder to extend the length of the lease term. This process adds years to the existing lease, in return for a premium paid to the freeholder.
Why might I want to extend my lease?
Extending your lease will increase the value of your property. Properties with longer leases are more attractive to both buyers and lenders
It also avoids the complications and costs associated with a lease falling below 80 years, at which point the property can significantly depreciate in value and become difficult to sell or remortgage.
Marriage value
Marriage value is a legal concept that applies when extending the lease on a residential property when the remaining lease term falls below 80 years.
It represents the potential increase in the property's value due to the lease extension, essentially the additional value created by "marrying" the existing lease with the new extended term.
When a lease is extended, the value of the property typically increases because a longer lease is more attractive to potential buyers and lenders. If the lease has fewer than 80 years left, the law allows the freeholder to claim a share of the increase in value - the marriage value - resulting from the extension.
The marriage value is calculated as 50% of the increase in the property's value attributable to the lease extension. Importantly, if the lease has more than 80 years remaining, there is no marriage value payable.
It is, therefore, highly advisable to extend your lease before it falls below 80 years.
See also:
Can I sell my leasehold property with a short lease?
Should I buy a property with a short lease?
Am I eligible to extend my lease?
If the original lease term was for 21 years or more and you have owned your lease for at least 2 years, you have the right to enter negotiations with the freeholder to extend your lease.
What is the process of extending a lease?
Under the Leasehold Reform, Housing, and Urban Development Act of 1993, leaseholders have a statutory right to extend their lease.
The process begins with obtaining a valuation from a qualified surveyor to estimate the cost of the extension.
Once you have a valuation, your solicitor will serve a Section 42 notice (formal request) on your freeholder, expressing your intention to extend the lease.
Following the statutory route by serving a Section 42 Notice on the freeholder means that:
- a prescribed lease extension process and timeline will be followed.
- an additional 90 years will be added to the lease.
- your ground rent will be reduced to zero (peppercorn).
Negotiations with the freeholder typically follow, leading to an agreement on terms. If terms cannot be agreed upon, you may need to apply to a tribunal to settle the dispute.
Is there an informal process I can follow?
Leaseholders can follow an informal route instead of the Section 42 Notice route. This route would require you to contact the landlord (typically the freeholder) directly to negotiate the lease extension.
The informal route is not recommended, however, as there are no prescribed regulations guiding the process. Consequently, the landlord could refuse the lease extension or demand an unreasonable price for granting it.
How much does it cost to extend a lease?
The premium you will need to pay to extend your lease will depend on your property's value, the current length of the lease, and the ground rent. Generally speaking, the shorter the lease, the more expensive the extension. A lease extension surveyor can provide you with an estimate.
What other costs will I have to pay?
In addition to the premium for the lease extension, you will also have to pay the freeholder's legal and valuation fees, your own legal and surveyor fees, and potentially tribunal costs if negotiations are unsuccessful.
Do I need a solicitor to extend my lease?
Although you can technically negotiate a lease extension on your own, instructing a solicitor experienced in lease extensions is recommended. A solicitor can manage the entire legal process, ensuring that all legal documentation is correct, and representing your interests during negotiations.
FAQs
How long does a lease extension take?
The lease extension process timeframe can vary significantly, depending on the complexity of negotiations between the leaseholder and freeholder, the responsiveness of both parties, and whether the case ultimately goes to a tribunal.
A straightforward lease extension where both parties cooperate might take between 3 to 6 months.
If negotiations are prolonged or if the matter is goes to a tribunal, it could take 12 months or more.
What if there is a missing (absent) freeholder?
You must first attempt to locate the freeholder using reasonable means. If the freeholder cannot be contacted or located, your solicitor can apply for a lease extension order through a Leasehold Valuation Tribunal (LVT).
The LVT will assess your case, including the effort made to find the freeholder and the merits of the lease extension request. Upon approval, the tribunal determines the terms of the lease extension, including the premium to be paid, effectively granting the lease extension in the absence of the freeholder's direct consent.
I want to sell my flat but the lease will drop below 80 years within 2 years of purchase. What can, I do so the buyer won't have to pay marriage value?
A common strategy advised by conveyancing solicitors is for the seller to start the formal lease extension process before the sale completes. The seller can then assign the transferable right to the buyer as part of the sale.
This approach means that the buyer inherits the seller's right to extend the lease without having to wait 2 years.
The seller starts the process by serving a Section 42 Notice between exchange and completion. The seller's conveyancing solicitor will then draw up a "deed of assignment" between the buyer and seller.
The buyer then continues the lease extension process until it completes, usually 2-3 months after they have bought the property.
