Do you know how to extend your property lease?
If not, it’s important to understand how to extend a lease before it gets close to running out. It’s a complex legal area, and one that’s worth getting your head around sooner rather than later – we outline the process for extending a lease and look at the options below.
Generally, if you own a flat in Wimbledon Village or the wider areas around London, the flats will have been sold on a leasehold basis. Most houses in London are freehold but this is not always the case. According to recent figures, at least 35% of properties in London are leasehold. Properties sold under shared ownership schemes are also leasehold.
In this guide, we explain how to determine whether a property is leasehold or freehold, what the key differences are, and how you could be financially impacted by owning a leasehold property.
Leaseholders can incur costs from thousands to tens of thousands of pounds extending their lease. In January 2021, the government proposed making it easier and cheaper for leaseholders to extend their lease, own their property on a freehold basis and do away with ground rent.
In 2022, the government banned ground rents on new leases, and the soon-to-be introduced Leasehold and Freehold Reform Bill legislation will further help leasehold property owners address high service charges and difficulties in extending leases.
In summary, the reform aims to bring the following changes:
But what is the objective of the legislation, what does it mean for people looking to buy a leasehold property, and do current freeholders need to do anything to prepare? Let’s take a look.
In the rest of this article, we explain the current rules and look at why and when you should extend your lease and the steps and costs involved.
If you own a flat or apartment in southwest London or are thinking of buying one, it is likely to be leasehold property. Leasehold is the most common form of flat ownership in England and Wales and means that you have a right to live in the property for a set period. For more information on how leasehold works and how it differs from freehold, read our blog article on the difference between freehold and leasehold. You can check the Land Registry to see whether a property is leasehold or freehold.
As the length of the lease drops, so does the value of your leasehold property. If the lease is under 80 years, it will become challenging to sell because the price the leaseholder must pay the freeholder to extend the lease rises dramatically due to something called marriage value. Very briefly, marriage value is the increase in the value of a property after the lease is extended. On leases with less than 80 years to run, the freeholder is legally entitled to 50% of the additional value created by the lease extension.
It is essential to keep track of the length of your lease, especially if you are looking to sell in the future, as this will impact the sale price you achieve.
You will extend the lease on your property for a set period of time. Currently, there are restrictions on extending existing leases—houses can be extended by 50 years, while flats can be renewed for up to 90 years. How long you decide to extend will depend on your circumstances. If you want to sell the property in the near future, you should make sure that the lease has at least 80 years left, as it will put people off buying it otherwise.
When the Leasehold and Freehold Reform Bill passes through Parliament, the plan is for leaseholders to have the right to extend by 990 years.
The cost of extending a lease varies considerably and depends on the flat’s value, the lease length and the ground rent. Typically, extending a lease can cost between £5,000 and £20,000 but leases with less time remaining, for example, less than 90 years, can cost more.
The average sale price of a flat in Wimbledon over the last 12 months was £472,236. To give you a rough idea of how much it would cost to extend a lease in Wimbledon, you can expect to pay around £8,000 to extend the lease of a flat valued at £500,000, which has 90 years remaining on the lease. The cost could rise to £10,500 if the lease has 85 years remaining and £30,500 if there are only 79 years left. You can take a look at this leasehold extension calculator to help you understand the costs involved for flats.
On top of the lease extension cost itself, you will also have to pay your own legal costs and valuation fees and those of the freeholder. Expect this to cost between £4,000 and £5,000. Even then costs can be much higher than this depending on the specific situation of your property.
If your lease is 90+ years, you are unlikely to benefit from extending your lease as the value added to your property will probably not justify the costs you will incur.
When your lease has between 83 and 89 years left to run, you should begin the process of extending. Extending a lease can take time, so avoid letting it get close to the 80-year mark, as your negotiating power with the freeholder is reduced because your need to extend is more urgent.
Leases with less than 83 years need to be extended urgently. Once a lease drops below 80-years, even if this is just one day, the marriage value kicks in, costing you thousands of pounds more to extend.
Leaseholders often ask us whether they should extend their lease now or wait until the new legislation comes in. This is a difficult question to answer as it will depend on individual circumstances. If you are looking to sell shortly and your lease is less than 90 years and especially if it is close to 83 years, you may not have the option to wait.
However, if you are not planning to move, it might be worth waiting to see what happens when the new legislation comes in and also see what announcements might be made about further stages of the reform.
Under the current regulations, you must have owned the property for at least two years before you are legally entitled to extend the lease. The government want to remove this requirement in the reform.
The legal process for extending your lease is called leasehold enfranchisement. The lease extension process steps you’ll need to take are as follows:
Find a solicitor who specialises in leasehold extensions. The Association of Leasehold Enfranchisement Practitioners has a list of solicitors who are experienced in this field. You can also get independent advice from the Leasehold Advisory Service, a government-funded service specialising in leasehold extensions.
The next step of the process is to obtain lease extension valuations. Consult a valuation surveyor who will recommend a realistic cost for extending your lease; this is called the premium. Your valuer will collect evidence to support your offer, which they can use when negotiating with the freeholder.
Your solicitor may direct you to a valuer, or the Association of Leasehold Enfranchisement Practitioners.
Your solicitor will serve the freeholder with a Section 42 notice, under the 1993 Leasehold Reform, Housing & Urban Development Act, proposing your premium for extending the lease.
At this point, most freeholders will ask for a deposit. This will either be £250 or 10% of the proposed premium, whichever is greater.
Your solicitor will specify when your landlord should respond to your offer; this must be no less than two months from the date you served notice.
Hopefully, the freeholder will accept your offer. If they counter-offer, your valuer will negotiate on your behalf.
If your landlord doesn’t respond or submits a response after the deadline, you can apply to the county court for a lease extension on the terms set out in your notice. You must do this within six months of the original deadline.
If you and the landlord disagree about the lease extension, it can be referred to an independent body known as the First-Tier Tribunal. Orders made by the First-Tier Tribunal can be appealed against in an Upper Tribunal if either party thinks there was a legal problem with the original decision. Once the Upper Tribunal has given its ruling, it can be enforced by a county court order. This is a time-consuming and expensive process and is best avoided.
When it comes to extending a lease, the crucial thing is to begin in plenty of time. If the number of years on the lease falls below 80, you will be liable for the marriage fee, and the process will be much more expensive.
Whilst it may be tempting to save money on legal fees by negotiating with the freeholder yourself, a specialist solicitor and valuer may save you money in the long run because they can make sure you don’t pay over the odds.
There is a formula to calculate the premium for a lease extension. There are many online calculators widely available that you can use, however, they are based on national data and will only give you a rough estimate of the premium as they do not factor in every local detail. Here is one online lease extension calculator that you can use. For accurate costs, it’s always best to seek advice from a solicitor and valuation surveyor.
The Leasehold Reform, Housing and Urban Development Act 1993 specifies a firm process and timescales for tenants/lessees looking for a leasehold extension.
There are a range of timescales and requirements that the tenant and landlord must be aware of and follow, which should give a good idea of how long the process will take. However, disputes or missed deadlines can have serious consequences, increasing the time it takes to complete the lease extension.
The time taken to extend a lease will depend on many factors, but typically, it can take between three months and one year. If you can negotiate and agree on matters with your landlord informally, then the process will be quicker.
If you live in a leasehold property, an alternative to extending a lease is to get together with your fellow leaseholders and buy a share of the freehold. This is known as collective leasehold enfranchisement.
You will need to get at least 50% of leaseholders in the apartment block to agree to participate for the collective enfranchisement to go ahead. You would then jointly own the property outright.
Tenants considering a lease extension or buying the freehold to their flat (collective enfranchisement) will need to carefully consider the advantages and disadvantages of both options.
Depending on the length of your lease and the number of leaseholders participating in the collective enfranchisement, extending the lease can cost around the same amount as buying the freehold.
Here are some of the pros and cons of flat owners buying their freehold:
Before making any decision, is always advisable to seek independent legal advice to discuss your specific circumstances.
If you have any questions or if you are looking to buy, sell, rent or let a property in the Wimbledon area, contact us today.
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