Anyone who owns a leasehold property needs to understand how to extend a lease before the length of the lease begins to run out. It’s a complex legal area and one that’s worth getting your head around sooner rather than later – we explain the process for extending a lease and look at your options.
New government reforms for leaseholders
Leaseholders can incur costs from thousands to tens of thousands of pounds extending their lease. In January 2021, the government laid out proposals to make it easier and cheaper for leaseholds to extend their lease, own their property on a freehold basis and do away with ground rent. You can read the full government press release here.
In summary, the proposals are:
- All leaseholders will have the right to extend their lease by 990 years at zero ground rent.
- Calculation rates will be set for leasehold extensions to ensure a fairer, cheaper and more transparent price. Marriage value costs for leases less than 80 years will be abolished. Exactly what the new cost model will be is not yet known.
- A Commonhold Council will be created to increase the take-up of commonhold, allowing homeowners to own their property on a freehold basis.
There is no set timetable for when these new reforms will become law, and the exact detail of the legislation is undecided. 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.
Why would you extend your lease?
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.
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.
It is essential to keep track of the length of time on your lease, especially if you are looking to sell in the future, as this will have an impact on the sale price you achieve.
When should I extend my lease?
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 in the near future and your lease is less than 90 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.
Who’s allowed to extend a lease under the current rules?
Under the current regulations, you must have owned the property for at least two years before you are legally entitled to extend the lease.
What are the steps to extending my lease?
The legal process for extending your lease is called leasehold enfranchisement. The steps you’ll need to take are as follows:
1. Appoint a solicitor
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.
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 is an excellent place to look.
3. Make a formal offer
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.
4. Pay the deposit
At this point, most freeholders will ask for a deposit. This will either be £250 or 10% of the proposed premium, whichever is greater.
5. Negotiate the price
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.
6. If you fail to agree, apply to the First-Tier Tribunal
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.
How much will it cost to extend my lease now?
The cost of extending a lease vary considerably and depends on the flat’s value, the lease length and the ground rent.
To give you a rough idea, 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.
On top of the lease extension cost itself, you will also have to pay your own legal and valuation fees and those of the freeholder. Expect this to cost between £4,000 and £5,000.
How can I keep lease extension costs down?
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.
Is it worth trying to buy the freehold instead of extending my lease?
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 enfranchisement.
You will need to get at least 50% of leaseholders in your block to agree to participate for the collective enfranchisement to go ahead. You would then jointly own the property outright.
If you are looking at leasehold properties in Wimbledon or Coombe or have a leasehold property to sell, we’d be happy to advise you. Please contact us to find out more.