Lease Extensions
If you’re a leaseholder of a property, be that a flat, apartment or house, you need to know what a lease extension is, why it may benefit you, and how to get one properly.
Although costly to get one, a lease extension can save you money in the long term and ensure that your property investment is protected.
If you’re looking to get a lease extension or are curious to know more about this area of lease enfranchisement, here’s everything you need to know.
For lease extensions we cover London, Bromley, Croydon, Tunbridge Wells, Orpington, Sevenoaks and Brighton.
What is a lease extension?
Leases on property expire after a specified period. To avoid this from happening to a leasehold property you own, you can extend your lease and have a right to do so under the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act).
A leasehold property with a remaining lease term that is considered low can cause many problems. For example, you may find it challenging to sell the leasehold contract once the term reaches a certain point, as new potential buyers may not be offered a mortgage. Plus, the less time you have on your lease, the less your property is worth.
When you get a lease extension, you can add an extra 90 or 50 years to your lease term, depending on your property type. As well as this, the annual ground rent you have to pay will also be reduced to nothing.
There are many reasons why people should consider extending a lease. Here are some of the most important examples:
Increase the value of your property
When you have a leasehold property, the value of it is intrinsically tied to the amount of time you have left on your lease. The less tme you have less on your lease, the lower your property will be worth . This is true even if the property is the same and located in the same area.
If you bought a leasehold property 30 years ago and are now looking to sell it, you could find that it’s worth less than when you bought it, even if other freehold properties around you have risen in value.
To ensure that you can sell your property for a fair price and protect your investment, it’s worth extending your lease to restore its value.
Avoid paying marriage value
Marriage value is used to describe the increase in value of your property when extending the lease. So if a flat increases from £250,000 to £300,000 once you extend the lease, its marriage value is £50,000.
If you leave your lease extension too late, you’ll have to pay your freeholder 50% of this value as part of the premium for the lease extension. If the remaining lease term is under 80 years, you must make the 50% marriage value contribution, so you must extend your lease well before it reaches that point.
Lease extensions can be a significant expenses depending on the property and other factors. Extending a lease can already cost you a considerable amount of money, so having to pay half of the marriage value, being £25,000 in the previous example, can more than double the amount you have to pay.
Don’t get caught out, and be sure to extend your lease at the right time.
Reduce ground rent to zero
Ground rent was abolished for new leases in 2022. This means it’s cheaper for new leaseholders as they don’t have to pay this annual fee. However, if you extend your lease, you can abolish and remove your ground rent.
This can save you money in the future and is worth doing if you plan on living in the property for an extended period. Reducing your ground rent to zero is also often referred to as being reduced to a peppercorn.
Make it easier for buyers to get a mortgage
If you want to sell your leasehold, you must do so before the lease term falls below 80 years. This is because there will be more limited mortgage lending options the shorter the lease is, so some potential buyers may not be able to get a mortgage.This limits who you can sell to.
In addition, many buyers will be put off from leaseholds that have less than 90 years on their current lease, as they know that after a few years, they’ll run into trouble. Extend your lease before selling your house to ensure the selling process goes smoothly.
Please read our lease extensions ultimate guide for more detailed information.
Get help with lease extensions
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What is the lease extension process?
You need to follow a defined process when getting a lease extension that’s been laid out by The Leasehold Reform, Housing and Urban Development Act 1993. The full process will look something like this:
- You’ll start by instructing a lease extension surveyor to inspect and value your property, working out how much it will be worth once you extend your lease. This value, among other factors, will influence how much you should pay for your lease extension.
- After this, you’ll send a Tenant’s Notice, officially known as a Section 42 Notice, to the freeholder. This notice informs the freeholder of your intentions to extend your lease and contains vital information about the property and how much you’ll pay for the extension. The freeholder has a minimum of two months to reply.
- If your offer is agreed upon, your freeholder will return a Section 45 Notice. This notice would either offer complete acceptance of the terms, a complete rejection, or a counter proposal. If a counter proposal is sent, the Section 45 Notice will include a revised premium and any other terms. After the price is set, you’ll have to pay a deposit of 10% of the lease extension cost or £250, depending on what’s higher. You’ll have to pay this within 14 days of the agreement and the rest later.
- If no agreement is reached, you’ll need to take the matter to the First Tier Tribunal, where they’ll devise a final offer that must be accepted. Once issued, you’ll have to pay a standard deposit and legal fees for yourself and the freeholder. No matter the outcome, you will always be liable for the other party’s fees.
This process can take 12 months or more, so don’t delay.
What is The Leasehold Reform, Housing and Urban Development Act 1993?
The Leasehold Reform, Housing and Urban Development Act 1993 gives leaseholders the right to extend their lease by up to 90 years for a flat or 50 years for a house. This legal legislation protects leaseholders and makes it easier for them to get a statutory extension, provided that you meet the eligibility criteria.
As well as laying out the rules and process that needs to be followed, it also contains information on how a lease extension premium should be worked out, so it’s a document that solicitors and surveyors heavily rely on and have extensive knowledge about.
To ensure that you have eligibility to extend your lease under the 1993 Act, you need to meet the following criteria:
- You need to have been the leaseholder of the property for over two years
- The original length of the ease needed to be over 21 years
The Leasehold Reform, Housing and Urban Development Act also forbids you from getting this lease extension if the freeholder is a charitable trust or if the lease is a commercial lease.
What is a Section 42 Notice?
You must send a Section 42 Notice to your freeholder to start the lease extension process. This notice informs the freeholder of your property that you intend to use your right under the 1993 act to extend your lease.
Your solicitor sends this notice on your behalf and will include an offer on the premium you’re willing to pay. Your valuation will influence this premium.
If the freeholder agrees to a Section 42 Notice, then you have the right to extend your lease by 90 years if the property is a flat, and it also means that your ground rent will be reduced to zero.
When sending a Section 42 Notice, a few pieces of vital information need to be included for it to be valid, with one of the most important being the date it was sent. This is needed as the freeholder has two months to respond to the notice, so they have no deadline to respond if no date is present.
The freeholder or landlord of the property can refuse a Section 42 Notice and send a counteroffer if they feel that the fee is too low and doesn’t represent the property’s value. This counteroffer is a Section 45 Notice and must be sent within two months of the original Section 42.
If you’re struggling to both agree on a price, you do have up to six months to negotiate and find a compromise that works for both parties. However, if it doesn’t look like an agreement can be reached, make sure to apply for it to be settled at a First Tier Tribunal before six months pass. Otherwise, you won’t be able to get an authoritative verdict for this specific Section 42 Notice.
A solicitor will help you draft a good Section 42 Notice. Here are a few things, as well as the date, that you need to include per The Leasehold Reform, Housing and Urban Development Act 1993:
- Your full name as it appears on legal documents
- The address of the property you want to extend the lease on
- Information about the property so that it can easily be identified
- Details of the lease, including the start date and number of years it had when you first bought it
- Your offered amount for the lease extension
- Date the landlord needs to give their counter-notice. It must be at least two months
Lease Extension Top Tips
If you’re a leaseholder and are thinking about getting a lease extension, here are a few top tips to ensure that you can save money when going through the process, as well as some advice to make the process easier.
Use a lease extension calculator
You don’t want to blindly go into the lease extension without having a ballpark idea of how much doing so will cost you. Before starting the journey, use a lease extension calculator to help give you an accurate picture of what your premium should be worth.
Most calculators will use information like your property’s value, the remaining term on your lease, and your current ground rent to figure out an accurate price. Once you have this number, you can instruct a surveyor to inspect your property and give you an exact price. This may differ slightly from the calculator because they have more information to help with their calculations.
Negotiate with your freeholder
The amount that your premium for a lease extension should cost is more objective than subjective. This is because the price is determined based on your property’s value and various formulas and guidelines set by the 1993 Act. However, that doesn’t mean you must strictly adhere to this number when sending your Section 42 Notice.
When you get your valuation, a surveyor will usually give you a range or three prices that they consider low, medium, and high. If time is on your side and you can spend six months negotiating a fee, it’s worth submitting a notice with a premium at the low end of this range.
This means you have an increased chance of getting a lease extension for a lower price than average after a few rounds of negotiation. Be aware that if you can’t reach an agreement and have the case taken to a Top Tier Tribunal, the premium they decide is final and may be more than the price you were negotiating.
Extend your lease early
The longer you leave it to extend your lease, the more it will cost you when you do. Once your remaining lease term gets close to 80 years or below, each year you delay can cost you a significant fee and even more depending on your property price.
As a rule of thumb, getting a lease extension before the term hits 85 years, and definitely before 80, is advisable. This is because once it’s under 80 years, it’s very difficult for people to get a mortgage on it as there will be more limited options making it harder for you to sell, decreasing its value massively.
Plus, when you extend your lease from a term under 80 years, you’ll have to pay 50% of its marriage value to your freeholder. This means you’ll be paying half the amount the property value increased by due to the extension. So if it grows from £250,000 to £300,000, you’re paying an extra £25,000 on top of your premium.
By extending your lease as early as possible, you’ll save money both in the short and long term.
Lease Extension FAQs
Do I need a surveyor for a lease extension?
Yes, you need both a surveyor and a solicitor to extend your lease optimally. The surveyor undertakes the valuation and engages in negotiations with the freeholder on your behalf. Meanwhile, the solicitor is responsible for serving the required legal documentation and handling the legal aspects of the transaction.
How much does getting a lease extension cost?
Many things influence the cost of your lease extension. Some of the main things that determine how much you have to pay include the following:
- The drop in value of the freeholder's interest caused by the extension to the term
- How much the property's value increases from the extension
- The amount you were paying for ground rent that is now reduced to zero
- The location of your property
Can you get multiple lease extensions in succession?
The lease on a property can be extended multiple times if the leaseholder meets the eligibility criteria. However, the likelihood of extending a property more than once is pretty low.
As the lease term will be extended by 90 or 50 years, there's a high chance that you will no longer be at the property before you reach a point where you need to extend it again.
What is a leasehold property?
A leasehold is a property where you own the a building or a defined part of the building for a specified period. It's different from a freehold because those properties are owned indefinitely. When a leasehold term finishes, the property is technically returned to the freeholder that sold it as a leasehold.
Having a leasehold can have a few limitations on what you can do with the property, with most flats being leaseholds.
How common are leasehold properties?
According to government information, only 8% of all houses were leasehold properties in 2021. This means that they take up a tiny fraction of that market.
However, when limiting the properties to flats and apartments, you'll find that over half (58%) were leaseholds during the same period.
Furthermore, some locations have a higher proportion of leaseholds, such as areas like London and the South West, making them far more common.
What are my rights under The Leasehold Reform, Housing and Urban Development Act 1993?
As long as you're eligible, the 1993 Act gives you the right to extend your lease by 90 years and ensures that your landlord can't enforce an inflated price for your lease extension and also ensures that they can't refuse.
They can reject a price for a lease extension initially, but if you take the case to the First Tier Tribunal, they must accept the final valuation.
How long does a lease extension have to be?
When getting a lease extension under the 1993 Act, the terms will automatically be extended by 90 or 50 years, depending on the property type. This means that this extension term is both the minimum and maximum you can extend your lease.
However, if you're ineligible for a lease extension via this method and want to extend your lease informally, you can propose any number of years you like with your freeholder. It'll still be best to aim for the 90 years you can get with a statutory extension, but be aware that the freeholder can reject it and offer a lower extension period.
What if I can't get hold of the freeholder?
You must issue a Section 42 Notice to your freeholder to start the process, so if they're unreachable, things can be tricky.
You can apply for a Vesting Order to extend your lease without the freeholder if they're uncontactable. However, for this to happen, you must provide evidence that you've tried contacting the freeholder. This includes doing things like:
- Putting up adverts in the local newspaper
- Hiring a search agent to find them
- Visiting the last known address of the freeholder
- Checking the probate records
How long will it take to extend a lease?
The lease extension process can take a long time, which is why you shouldn't wait too long before you do so. From instructing a surveyor to inspect your property and issue an accurate valuation and potential premium, getting your lease extension can take up to a year..
This is because a surveyor may need a couple of months to organise inspections and get a value, and it can also take a while to draft and send your Section 42 Notice. Once that's sent, you can negotiate for six months before the case is taken to a First Tier Tribunal, which can take a further few months to conclude.
Are there any changes to lease extensions and leaseholds in the future?
The rules surrounding leaseholds had already changed in June 2022, when ground rent was abolished for all new leases. This means that when you extend a lease, you will longer need to pay ground rent.
As well as this, there are set to be new leasehold reforms that can change how lease extensions work. The main one is that the extension term is being proposed to be increased from 90 years to 990 years. As well as this, the marriage value contributions are being discussed.
It will take a few years for these changes to come into effect, and these proposals will likely be diluted and reduced, so don't wait for these changes before extending your lease.
