If you own a residential property on a leasehold basis, there are many reasons why you may be considering extending your lease.
In most cases, the shorter the amount of time remaining on the leasehold, the lower the value of the lease becomes, and the more you will have to pay to increase the term of the lease. It also usually makes financial sense to extend the lease if have you have plans to sell the property.
In this guide, we explain the key considerations when deciding to proceed with a lease extension and the process you will need to follow to extend your leasehold.
What is a leasehold property?
Ownership of residential property can be in one of two ways: on either a leasehold or freehold basis. Owning a leasehold is different from owning a freehold, since freehold ownership means you own the property outright, including the land on which it sits. In contrast, when you own a leasehold property, you will only have these ownership rights for a fixed period of time.
Under a leasehold, you will have a written agreement with the freeholder, or landlord, described as a lease. Within the lease you will be referred to as the leaseholder or tenant.
Not to be confused with a short-term tenancy agreement, the lease will set out how many years you will own the property for.
The length of leaseholds can vary, although they will typically be for either 99 or 125 years, during which time the property can be bought and sold several times. Some leases can be for as long as 999 years.
Leasehold ownership of a house or a flat is essentially a long residential tenancy, giving the leaseholder the right to occupation and use of the property for the term of the lease — usually in return for a relatively low payment of ground rent on either a quarterly, bi-annual or annual basis.
The leasehold term is fixed at the beginning and so decreases in length year by year, although in some cases, depending on the terms of the lease, the ground rent may escalate.
For multi-occupancy buildings, ie; for leasehold flats, there may also be an additional monthly service charge fee to represent the cost to the freeholder of things like buildings insurance, maintenance and repairs for communal areas, and the overall costs of management.
Most flats are leasehold properties, although houses can also be leasehold, for example, those purchased through a shared ownership scheme. This is where you buy a percentage share of the property and then pay rent on the remaining share, although special rules apply to shared ownership properties when it comes to lease extensions.
There are also several cases of stand-alone residential dwellings still running under lengthy historic leaseholds, where houses were sold under long leases whilst wealthy landowners retained the land on which they were built.
Does my lease need to be extended?
When the lease eventually runs out, ownership of the leasehold property will revert to the freeholder. Whilst there are fairly robust legal safeguards in place to protect leaseholders from being evicted, leaseholders will usually want to avoid this situation and formally secure their interest in the property for a longer period.
Residential leasehold terms can run for several decades, meaning it is not uncommon for a lease to last for the entirety of an owner’s lifetime. However, leaseholders are advised to be aware of how long is left on their lease and to consider whether it makes financial sense, and provides additional security and stability, to extend the lease.
Even if there are several more years left to run on your lease, but you’re looking to sell, extending the lease can make the property a more attractive proposition for potential buyers and their mortgage providers. This is because financial lenders will only usually provide funding for leasehold properties with a minimum unexpired lease term. This could be anything between 70 to 85 years, although the lending criteria can differ between providers. Without a lease extension, this could limit your pool of purchasers to cash-only buyers.
The value of a residential leasehold will also gradually reduce as the lease shortens in length. By extending your lease, you can ensure the security of your leasehold tenure, whilst maintaining the maximum value in your property if you decide to sell or re-mortgage.
Am I legally entitled to extend my lease?
Whether you have the right to extend your lease will depend on a number of factors, including the type of property you own (house or flat?) and if there is shared ownership of the property.
Leasehold flats
When extending the term of a leasehold flat, you might be able to extend your lease by a period of 90 years, on top of your unexpired term. This would mean that if your lease had 70 years left to run, the new extended lease would be for 160 years. This right is to add 90 years to what’s left on the existing lease at a ‘peppercorn rent’. This means that no more ground rent is paid, although the landlord is entitled to charge a premium for extending the leasehold.
The premium is the sum of money that the leaseholder pays in exchange for a longer lease. The size of the premium is subject to negotiation, but based on a statutory formula. However, once your lease drops below 80 years, it becomes significantly more expensive to extend due to what’s known as ‘marriage value’. This is basically the increase in the value of the property attributable to the lease extension, to which the landlord is entitled to 50%.
To be a qualifying leaseholder you will need to have owned a long lease in relation to the flat for the past 2 years. A long lease is mainly one under which the original term was granted for more than 21 years, regardless of how long is now left remaining on the lease.
Leasehold houses
When extending the term of a leasehold house, you might be able to extend your lease by a period of 50 years, on top of your unexpired term, although if you live in a converted house the rules for extending a lease on a flat might apply instead. There is no premium payable for a lease extension of a house, although the ground rent throughout the 50 year extension may increase to a modern ground rent, which can be considerably more expensive.
As with leasehold flats, to be a qualifying leaseholder you must have owned a long lease in relation to your house for the past 2 years.
Shared ownership properties
There are a number of important differences between a shared ownership lease and other residential leases, where a shared ownership leaseholder only qualifies for the statutory right to extend their lease as the holder of a long lease if they have “staircased” up to full ownership. This is where the leaseholder has exercised their right to purchase additional shares in the property until they own 100% of the equity in it.
However, to avoid the difficulties regarding the reselling of shared ownership leases with only short unexpired terms, the landlord may have their own policy for allowing lease extensions where there is less than 100% ownership. In these cases, you should contact your landlord, often a housing association, to see if they offer an informal lease extension process.
Lease extensions with a share of the freehold
In some cases, you may own a share of the freehold. This is usually where a house has been converted into flats on long leases, where retaining the freehold only has residual value to the landlord. However, even if you benefit from part ownership of the building, you may still need to extend your lease. In these circumstances, you will need the agreement of the other leaseholders, but you will not usually expect to pay a premium.
How to extend your lease
There are two options when extending a lease: either a formal or informal route.
Informal lease extension process
Under the informal route, a leaseholder can approach the freeholder in the first instance and ask whether they’re interested in negotiating a lease extension, although there’s no obligation on the freeholder to agree to extend the lease following this request. They can accept the offer, seek to negotiate a different offer, or reject the proposal entirely.
If the freeholder agrees to a lease extension in principle, both parties will have to negotiate its’ terms between them. If agreement cannot be reached, or the freeholder refuses to enter into negotiations, provided you meet the relevant criteria you can go down the formal route.
Under the formal route, the freeholder and leaseholder need to follow prescribed rules, together with strict timescales, as set out by law. However, this statutory route offers more protection to a leaseholder if the parties cannot agree. This means that if you qualify for the right to extend the lease, but the landlord doesn’t accept your statutory right, the county court can be asked to decide. Any dispute as to price or terms can also be decided by a tribunal.
Statutory lease extension process
If you’re not able to informally agree a lease extension, you will need to follow the statutory process. This is started by service of the ‘tenant’s notice’ on the landlord, followed by a ‘landlord’s counter-notice’, although you must first be fully equipped and suitably advised before embarking on what can often be a very complex procedure.
Before you begin, and provided you’re eligible for a lease extension, you will first need to identify the ‘competent landlord’. This can be either a person or company, but it must be an individual or entity whose interest in the property is sufficiently long to be able to grant the extension. In most cases, the immediate landlord will also be the freeholder, although they may have an intermediate lease which is too short to grant your extension. This won’t prevent you from extending your lease, but you will need to identify a landlord with enough interest to grant the extended lease and upon whom you can serve your tenant’s notice. You may need to make inquiries with Land Registry, or serve an information notice on your immediate landlord or the freeholder, to establish details of any intervening or head leases.
Where applicable, you will also need to assess the cost of any leasehold premium. The question of “how much is a lease extension” is not an exact science, where there is no such thing as a definite, fixed price for a new lease. This means you will usually need to instruct a surveyor to provide you with an estimated range based on their experience of properties in the locality to help you decide how much to offer in your tenant’s notice. This will also provide you with some idea of best and worst case valuations for the purposes of any negotiations.
Having gathered the information needed, including a copy of your own lease and documents which prove you own the property, you will then be ready to serve your tenant’s notice. However, this must be accurate and complete, otherwise this could invalidate the process.
It’s therefore always best to seek expert legal advice, not only to help you to prepare and serve the tenant’s notice, but to respond to any challenge or requests for information that may be made by your landlord once the notice has been served. Your solicitor can also deal with the conveyancing process once the leasehold extension, including its terms, has been agreed.
When seeking a leasehold extension, you will be liable for your own professional fees and the cost of any premium, including an advance deposit. However, you will also become liable for the landlord’s ‘reasonable’ legal and valuation costs from the date you serve the tenant’s notice, even if your application is unsuccessful, so it’s essential that you get the process right.
Extending a lease FAQs
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Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.
