Understanding lease extensions

A high percentage of homeowners own a leasehold property. It is therefore important to understand what a lease extension entails. Extending your lease can seem like a daunting process due to the complexities involved. However, as your lease term decreases, the value of your property in turn decreases, making lease extensions essential if you wish to maintain or enhance the value of your property. If you are considering extending your lease, it is important to discuss your options with a legal advisor. At Blaser Mills, we aim to provide clear and comprehensive advice in plain English to ensure a seamless transaction.

If you are coming up to only having 80 years remaining on your lease, you should consider extending your lease. Once the term of years goes below 80 years, the premium payable for a lease extension will increase considerably. It is also highly likely you will face issues obtaining mortgage finance and selling your property. If you are considering selling your property with a lease term of 80 years, it is advisable to start the process of extending your lease now to avoid delays with your sale.

There are two ways in which your lease can be extended:

Statutory route:

You are legally entitled to extend your lease under the Leasehold Reform Housing and Urban Development Act 1993, so long as you are classed as a “qualifying leaseholder”. To be classed as “qualifying leaseholder”, you must meet the following criteria:

• You must have owned your property for 2 years or more
• Your lease was originally granted for more than 21 years
• Your property is not subject to conditions under freehold ownership by Crown or National Trust.

If you qualify under the Act, this allow your lease to be increased by 90 years and reduce your ground rent to a peppercorn (i.e. no ground rent would be payable).  The freeholder cannot refuse to extend your lease if you have owned your property for at least 2 years.

If you proceed via this route, the first step is to serve the freeholder with a S42 notice. A S42 notice is a formal notice from a leaseholder to a freeholder setting out the proposed terms of the new lease. Once this has been served, this begins the statutory lease extension process. The freeholder will then have 2 months to provide a counter-notice. The freeholder can either accept your offer or set out the terms acceptable to them You will be required to cover the freeholder’s legal fees as well as the valuation fees.

If the lease term drops below 80 years, marriage value also needs to be considered. The marriage value is the increase in the value of the property arising from the new lease. The Act states the marriage value must be shared equally between the leaseholder and freeholder. It is therefore in your best interests to begin the lease extension process before your lease term falls to 80 years to save additional costs.

If you are selling your property, you can begin the process of extending your lease and assign the benefit onto your buyer during the conveyancing process. This can save a lot of delays during the conveyancing process.

Advantages:

• You are guaranteed an extension of 90 years.
• You are guaranteed a reduction in ground rent to a peppercorn.
• The terms are governed by the Act so you can therefore exclude any unreasonable terms.

Disadvantages:

• The costs tend to be higher than the informal route.
• Some leaseholders class the statutory time limits as being too generous.

Informal route:

If you have not owned your property for at least 2 years’, you can still extend your lease outside of the statutory process. Even if you have owned your property for at least 2 years’, you may still decide to proceed via the informal route.

You would be required to negotiate with the freeholder as to the terms of the lease extension however, there are no set timescales in place. A valuer should still be instructed to ensure the premium being paid is reasonable. Again, you will be expected to cover the freeholder’ legal fees as well as the valuers fees.

Advantages:

• Some leaseholders prefer the informal route as they can extend the term past the 90 years permitted by the statutory route
• The premium and legal fees can be less than proceeding via the statutory route.
• If you own a share of the freehold, you can extend the term of years to as much as 999 years. In this situation, most leaseholders do not wish to charge each other a premium.

Disadvantages:

• As the freeholder is not bound by the statutory time limits, they may not be proactive which could lead to delays.
• Ground rent may not be reduced to a peppercorn. However, the Leasehold Reform (Ground Rent) Act 2022, states that freeholders are no longer permitted to add new ground rent to informal leases extensions (granted after 30^th June 2022).

Timescales:

Lease extensions can take anywhere from 3-12 months depending on the complexity of the matter and how prompt the parties involved are. Instructing experienced solicitors and valuers will help reduce the length of time taken to complete.

Changes to rules on lease extensions:

In January 2021, the Government outlined proposals to change the rules in relation to leasehold properties. The proposals would enable leases to be extended by 990 years, abolish marriage value and abolish ground rent for new leasehold properties. As these are only proposals, these rules are not currently in force.

If you would like to discuss your lease extension further, please contact Shannon Terry, Associate in the Residential Property team, who specialises in lease extensions.