Have you been putting off extending the lease on your house or flat? A lease extension can be seen as one of those tiresome administrative jobs that it’s only too easy to put to one side, often for years. But unfortunately, time is not on your side when it comes to the need to extend your lease. The process, however, does not need to be painful. But you will to choose check which of two routes to take – a formal or informal lease extension.
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Why do I need to extend my lease?
There are a number of extremely good reasons why you should extend your lease when it drops below around 85 years. The main ones are as follows:
- It can be extremely difficult to sell a house or flat with a short lease as most banks will not approve a mortgage. And if they do, the interest rates and fees applied can be high.
- Extending your lease will increase the value of your flat – and that increase in value will be greater as the remaining lease term drops
- And, of course, if your lease expires entirely, then you simply cease to own that property regardless of whether you have you have paid your mortgage off. Ownership passes to the freeholder.
The critical date for lease extension is 80 years – that’s why you need to start considering starting the lease extension process when your lease drops below around 85 years. There is a very good reason for that – once the length of your lease dips below 80 years, you will have to pay what is known as ‘marriage value’ to your freeholder. This is an additional payment to your freeholder for the loss of their interest in the property.
Watch out, because marriage value can add thousands of pounds to the cost of your extending your lease. And be aware that marriage value kicks in the day your lease drops below 80 years.,
How does a formal lease extension work?
Firstly you need to check that you And your leasehold flat or house actually qualify for a statutory lease extension. The most important 3 criteria are as follows;
- the lease must be what is referred to as a long leasehold i.e. it was originally granted for at least 21 years
- the lease must be for in residential, as distinct from commercial property and
- you need to have owned the flat or house for a minimum of 2 years. However, there is no requirement for you ever to have actually lived in the property
A formal, or statutory lease extension involves serving a section 42 notice on your freeholder stating that you want to extend your lease under the provisions of the Leasehold Reform, Housing And Urban Development Act 1993.
And using this statutory route means that you have a legal right to extend your lease. So as long as certain conditions are met, and your application is made correctly, your freeholder must grant you an extension of 90 years with the ground rent set at zero (it is actually referred to as a “peppercorn rent”, but it means the same thing). They cannot refuse.
The statutory route involves a formal and rigid timetable which both sides have to keep to.
You and your freeholder can negotiate the cost of your lease extension (known as the premium). Your freeholder is almost certainly going to have had an idea of the premium given to them by an experienced lease extension surveyor – and we always advise our clients to do the same. Because if you don’t get your own valuation, you really have no idea whether what your freeholder is proposing is reasonable or not. And that means you may end up paying far too much for your leasehold extension.
Formal Lease Extension – The Advantages
The advantages of using a formal lease extension process include:
• You don’t have to pay any ground rent future and a 90-year extension is guaranteed under the Leasehold Reform, Housing And Urban Development Act 1993.
• Your freeholder simply cannot refuse to extend your lease (except in very limited circumstances)
• In many cases, you may find that the premium is lower than what would be charged under the informal route. That’s because using the formal route, the freeholder has to agree to a reasonable price – and if there is any major disagreement between you and the freeholder about the right level of premium to set, the issue can be passed to the First-Tier Property Tribunal. That Tribunal referral is not available for informal lease extensions, when you either accept the premium offered by the freeholder, however reasonable or unreasonable the prices, or you don’t. Fortunately freeholder/leaseholder disputes of this type are relatively unusual.
Click here to read more about how the First-Tier Property Tribunal works
Formal Lease Extension – The Disadvantages
• You will be required to pay your freeholder’s reasonable legal and surveyor costs, as well as the legal and valuation costs of your own surveyor.
• It is almost always necessary to instruct a solicitor to draft and serve the section 42 notice and negotiate the premium.
• If you do not follow the procedure set out under the Leasehold Reform, Housing And Urban Development Act 1993 you can be prevented from serving another section 42 notice for 12 months.
• You need to have owned the property for two years to qualify to extend your lease under the Leasehold Reform, Housing And Urban Development Act 1993
(NB although if you are buying a property with a short lease and don’t want to wait 2 years, if the vendor has themselves owned the property for 2 years, you can get them to put the initial section 42 application in and assign the benefit of that to you on completion. Our team handle this kind of situation on a regular basis)
Want to know more about the formal lease extension process? Click here to read how to extend a lease
How does the informal lease extension process work?
In contrast, the informal leasehold extension process simply means cutting out the Leasehold Reform, Housing And Urban Development Act 1993. Instead, you approach your freeholder directly for what is also referred to as a voluntary or private lease extension. You can do so directly or through your solicitor.
You and your freeholder have complete freedom to negotiate any issue – including the level of the premium and the terms of the lease, the length of the extension. And this all takes place without any formal documentation being served, apart from the legal aspects of actually extending the lease registry net at the land registry. So there’s no need to serve a formal section 42 notice or for the freeholder to serve a counter notice, for example.
Although there are advantages to this approach to extending your lease, there are many pitfalls to watch out for.
Informal Lease Extension – The Advantages
• You can extend your lease even if you have owned your property for less than two years.
• Any length of extension as possible. So sometimes, people whose remaining lease term is short enough to create problems with lenders and vendors, but not short enough to perhaps need a full 90 years, choose a shorter extension – perhaps just 20 or 30 years.
So, for example if you only had 60 years left on your lease, a 30 year extension would leave you with 90 years, which should not be a problem for purchasers or lenders. And this means that the premium you would be expected to pay is likely to be cheaper than you would have to pay for a full 90 year extension.
• It is entirely up to you and your freeholder to change any other terms of the lease. So you might negotiate a lower ground rent, for example. But NB the 2022 act affects this – see below
• Your solicitor’s legal fees may be slightly cheaper when compared to a statutory lease extension – as no section 42 notice or other formal documentation is required
• You may not have to pay your freeholder’s costs – though most canny freeholders will insist you do so as part of any deal.
• If your freeholder responds swiftly, the process could be completed quicker than the more rigid timetable under the formal route.
Informal Lease Extension – The Disadvantages
• Your freeholder can pull out or change the terms of the deal at any stage. And there’s nothing you can do about it
• There is a high possibility you will end up paying more for your premium. That’s because the informal route does not require your freeholder to offer you a reasonable premium. You are entirely at their mercy. In the long run, therefore, you are unlikely to save any money.
• The process is not governed by the time limits set out in the Leasehold Reform, Housing And Urban Development Act 1993, therefore, an unmotivated freeholder can drag out the process, thereby increasing the premium they can charge. If your lease has close to 80 years or less to run you may be left with no choice but to start the entire process again under the formal route.
• If you are involved in an informal lease extension and a careless enough to let the lease drop below 80 years as a result of negotiations, you will probably find your freeholder withdrawing the offer, insisting instead that you use the statutory route – which entitles them to the additional marriage value payment
Formal or Informal Lease Extension – the need for a specialist valuation
As mentioned above, our team always recommend that you get a valuation of the premium you’re likely to get from a specialist lease extension. and just as very few solicitors specialise in this area, there are very small number of surveyors who have the expertise you need to carry out your lease extension valuation. But, our team have slowly an informal panel of surveyors throughout the country who specialise in these kind of of valuations. And , if you wish, our our team are happy to introduce you to one of our panel experts and instruct them on your behalf as part of our one-stop shop service.
Click here to read more about why you need to instruct a specialist lease extension surveyor
Formal or Informal Lease Extensions – What do our solicitors advise?
Every case does vary, but our solicitors usually advise you to stick with the formal lease process. It’s safer, certain, you keep complete control, and you know that the price you’re going to pay is reasonable.
Lease extension – FREE initial phone advice from our specialist leasehold team
Before you commit to either option, why not have an informal no strings attached chat with one of our team who can explain the advantages and disadvantages of each route in detail and advise you on the right one for your particular circumstances.
But don’t just rely on our word about how specialist our leasehold team really are.
We are the only solicitors recommended for leasehold extension advice by The HomeOwners Alliance – the leading organisation supporting the country 17 million homeowners.
Click here to read some reviews of our lease extension solicitors from satisfied clients