Formal or informal lease extension – what’s the difference?
What is a Statutory Lease Extension?
Owners of leasehold homes (both flats and houses) have a legal right to extend the lease on their property. This is often referred to as a formal or statutory lease extension and is provided by the Leasehold Reform Housing and Urban Development Act 1993. The right to extend a lease on a flat gives an owner the right to add 90 years to the current unexpired term, and also to change the current rent to a ‘peppercorn rent’ (which is in essence nothing at all). It’s fundamentally different to the informal, private or voluntary lease extension process as you will see below.
There are qualifying criteria in order to be able to use the statutory process. The main one being you must have owned the property for at least two years. This does not mean you have had to live there during that time, but merely own it in your name. ( NB don’t worry if you’re buying a short lease flat and want to extend the term, because you won’t necessarily have to wait for 2 years. The way around that is to arrange for the the vendor to make the formal application, which cost them nothing, and then assign the benefit of that section 42 lease extension notice over to you on completion. We deal with this regularly for clients.)
This is an individual right. This is quite different from a collective right, like exercising their right to manage or buying the freehold of your block (a process known as leasehold enfranchisement) – both of which require a cooperative application with other leaseholders.
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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 houses or flats with short leases 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 leases drop below 80 years.
Click here to read more about how lease extension works.
The Statutory Lease Extension Process
The statutory procedure starts by serving an initial notice of claim on the relevant freeholder/landlord. Once this is served, a pre-set statutory timetable begins. The recipient has two months from service of that notice to reply with a counter-notice.
Any failure to meet a statutory deadline during the lease extension process can have severe consequences for the party missing that deadline. Normally the claim is ‘deemed withdrawn’. That means the immediate right is lost. Instead the leaseholder has to wait for a whole year before they can begin the process again. And that can prove expensive.
Click here to read more about how to extend your lease
Statutory Lease Extension – what are the advantages?
There are many reasons why a leaseholder may prefer the formal rather than the voluntary process. These include the following;
- The freeholder can’t refuse to extend your lease
Provided you fit the criteria for the formal route, the freeholder simply cannot refuse to extend your lease. It’s your legal right.
- 90 years extra on the lease
The procedure forces the freeholder to add an additional 90 years to the end of your lease. So for example, if the term has dipped to say 50 years (making it very hard to sell except to cash buyers), a formal leasehold extension will increase it to 140 years, regardless of whether your freeholder likes it or not.
This means landlords who prefer to collect their ground rent from the leaseholders in their block can’t stop a statutory lease extension claim from a leaseholder – provided they meet the qualification period.
- The lease term stops getting shorter
When the unexpired term left on the lease (referred to as the “residual term”) drops below 80 years, issues can arise. In particular the freeholder is entitled to an additional payment, known as “marriage value”. As a result the payment (or premium) payable to the freeholder will often balloon once that unexpired lease drops below 80 years.
Another advantage of using the statutory route is that as soon as the application is made, and the notice served, the clock stops – the lease stops running down, and is fixed at the date the initial notice was served until the leasehold extension is complete.
This grants the leaseholder the peace of mind that even if the lease term falls below 80 years during the proceedings, the freeholder can’t demand a greater premium, as the valuation date has been fixed.
- Zero ground rent
Another big advantage of the formal route is that it effectively removes the need to pay any ground rent. and with some flats (and even houses) ground rent is becoming an increasing problem – especially with some leases which commenced when inflation was higher in the automatic increase in ground rent every few years reflected that. So, for example, a 1970s lease allowing for the ground rent to be doubled every 10 years means that annual payment is already 1600% higher than originally set!
NB to be strictly accurate, the ground rent is reduced to what is called a “peppercorn rent”. There are technical legal reasons for this, but in reality it still means no ground rent.
The Statutory Lease Extension Process – What are the disadvantages?
As much as the statutory timetable is generally the much safer route for leaseholders, it tends to take longer, and the legal costs are usually slightly higher.
Once you serve the initial notice on your freeholder, the process takes, on average, between 4-6 months. As specialist solicitors who know the legislation, we can try to reduce this, but some freeholders try to drag their heels as long as possible as a negotiation tactic.
What is an informal lease extension?
A private, informal or voluntary leasehold extension is one that is outside of the statutory procedure. It simply means that the freeholder and leaseholder privately agree on the terms to extend the lease. As this is an informal procedure, the qualification criteria of the statutory route simply doesn’t apply. That means, you as a leaseholder can ask your freehold for a private extension at any time.
But the big catch is that, unlike the statutory procedure, when looking to go down the voluntary route, the freeholder doesn’t have to actually agree to extend your lease on fair terms, or at all. And there’s nothing you can do to force them without going down the formal route
As this is a private route, there is less legal work involved, as there aren’t any statutory notices or timescales to be adhered to. This often means that if you are offered a good deal, an informal lease extension may also save some money in legal fees and, with the freeholder’s co-operation, can be completed more quickly as well. But remember, you can’t rely on it – and the freeholder can pull out or change the terms at any time.
The informal route – why freeholders like it
Freeholders often prefer this route. Why? That’s because in a privately negotiated lease extension, they will often keep some of the ground rent they currently collect under the current lease. In contrast, with the statutory procedure this is reduced automatically to a peppercorn or nil ground rent.
What’s more, freeholders are often more than happy to agree to short lease extensions. Firstly, these tend to be more expensive in comparative terms when compared with 90 years extra on the lease, and secondly they usually allow the possibility of further leasehold extensions and therefore extra premium payments to the freeholder. So, for example, we have had clients who only want to extend their lease by 10 or 20 years – purely to make sure their flat is saleable and mortgageable. But the premium payable is comparatively more expensive and in addition, legal and valuation fees for both yourself and the freeholder are still due. So short lease extensions usually don’t provide great value for money and we will often advise against them on that basis. And, of course, they are only available using the voluntary route.
Ground rents are a really hot topic in the leasehold world currently. And without adequate advice from specialists like our team, leaseholders will often end up with a bad deal which can affect their ability to sell their property in future.
We came across an example of this ourselves a few years ago. A client came to us having negotiated an informal lease extension herself, asking us to deal with the legal paperwork. Unfortunately, though she had indeed negotiated a lower premium, she had also agreed to a variation of the ground rent terms in the lease. And those new terms meant that within 40 years, her ground rent would increased to tens of thousands of pounds every year! This guaranteed that her property effectively became impossible to sell. Fortunately we explained the error of her ways and managed to negotiate a sensible deal for her.
Informal lease extensions – what are the advantages?
One advantage of pursuing the voluntary route is the time frame. Without the rigidity of the statutory timetable, the speed of the overall transaction can be a lot quicker. We roughly estimate the process to take around 1-3 months. This is of course dependent on the freeholder and their solicitors cooperating and dealing with the transaction in a timely manner.
Another advantage when going down the voluntary route, is the fact that the terms of the extension are not pre-determined. So, depending on cooperative your freeholder is, you can try to negotiate terms which best suit you. For example, often clients will want to ‘top up’ their lease so it is back to their original term, normally 99 or 125 years. They do this because they want to sell the property and potential buyers will be more attracted to the longer term. And because your “top up” is likely to be less than an additional 90 years, you would normally expect to pay less of a premium to your freeholder. That’s in contrast to the statutory route where you are forced to purchase an additional 90 years to add to the unexpired term, which is likely to be more costly for you.
The leaseholder and freeholder often also consider other changes to the lease when choosing the voluntary route. They may negotiate changes to ground rent for example.
The voluntary route –What are the disadvantages?
- Beware of restrictive new clauses in your lease
When you negotiate with your freeholder for a private leasehold extension, there are no limits on what the landlord could try to get the leaseholder to agree to. Because of this, it’s really important that your solicitor is a lease extension specialist who can advise on whether the deal being offered is a good one or not. Negotiations with the landlord over the terms offered can sometimes stretch into weeks, which of course may increase costs.
Often during voluntary negotiations, as it is an entirely informal, freeholders try to amend the actual wording of your current lease – for example adding in an additional covenant not to have pets in the property. Some of these clauses are very complex and requires specialist legal advice on their effect. Too often leaseholders try to complete the informal extension with their freeholder on their own, without legal advice. This can cause a variety of problems later on should they try to sell the property subject to a new but unfavourable clause in the lease.
- You can’t compel your freeholder
Perhaps the biggest disadvantage using the private route, is that your freeholder can withdraw from the transaction at any time and right up to the point of completion, regardless of how much work has been done. And there’s nothing you can do about it.
This is because informal offers operate outside of the safety of the statutory procedure. This means that you, as leaseholder are still responsible for both your legal and valuation costs – and possibly, depending on what you agreed with the freeholder, their legal and surveying costs as well. But you have achieved nothing. And if you then decide to go down the statutory route, you are going to have to start the whole process from scratch.
- Beware marriage value and the 80 year level
If you are going down the private route, be particularly careful if you are approaching the critical 80 year period. That’s because the moment your leasehold term dips below 80 years, the freeholder is entitled to charge an additional part of the premium – known as “marriage value”. And that could cost you many thousands of pounds more.
While many freeholders are perfectly decent and honourable, others know how to play the game and with leaseholders whose lease is approaching the 80 years, they often offer to negotiate privately but drag their feet and stall, only to withdraw any voluntary leasehold extension offer the moment the lease drops below 80 years. That can prove very expensive for the leaseholder indeed.
That’s why with any leasehold term approaching 80 years, our specialist solicitors always strongly recommend the statutory route.
Formal or informal lease extension – Which method is best for me?
As we can see, the procedure for getting a leasehold extension can be very complex, and it’s often confusing for leaseholders to decide which route is right for them.
It is always worth instructing solicitors at an early point, sometimes even if you have not contacted your freeholder. Solicitors can contact your landlord on your behalf and see if they are our agreeable to a private extension and, if so, on what terms. They can then advise you on the terms of the offer and compare them to that of the statutory terms they could instead obtain if you qualify. Your solicitor can also help to weigh up your individual circumstances and needs and then assist you decide on the correct way forward.
Voluntary or Statutory Leasehold Extension – the need for specialist solicitors
Whether you go down the formal route or prefer a private lease extension, you’re going to need a solicitor. And that solicitor needs to be a specialist.
Why? Well particularly with the statutory route, the procedure is complicated with strict deadlines. So for example, missing just 1 of those deadlines or making a mistake in the initial notice, means that only does your application to extend your lease fail entirely fails, but you will also be responsible for your own wasted legal and surveying costs, as well as the reasonable legal and surveying costs of the freeholder. And you can’t even start a new application for 12 months.
In addition, as indicated above, there are plenty of risks involved in going down the private or informal route too – particularly if you try to negotiate your own terms.
And very few solicitors deal with lease extensions regularly. In contrast our 5 strong leasehold team deal with nothing but extending leases, freehold purchase and right to manage applications. And we have over 25 years’ experience in this area, handling up to 500 cases a year for leaseholders and freeholders alike.
What’s more, we are the only solicitors recommended for leasehold extension work by the 
HomeOwners Alliance– the country’s leading organisation representing Britain’s homeowners.
So if you’re looking for a lease extension, if you instruct the specialist leasehold team here at Bonallack & Bishop, you can ensure you have genuine specialists on your side.
Click here to read some reviews of our lease extension solicitors from satisfied clients
Formal or informal – you’re still going to need a specialist valuation
However you decide to extend your lease, in addition to specialist legal advice, you’re also going to need to know the right price to pay. And that means we always advise clients to instruct a specialist surveyor to prepare a valuation. That’s what your freeholder will do and you don’t want to put yourself at a disadvantage by guessing at the right offer to make. That’s playing into your freeholder’s hands.
Now, although the basis of calculation is set out in law, it’s still an art rather than a science, so there can be a difference between what two specialist valuer’s believe is the right value. That’s why you should never rely on the online leasehold extension premium calculators to set your price (though they can sometimes be useful to give you a very rough idea in advance).
And like solicitors, there are very few surveyors specialising in lease extension work. However, over the years we have gradually developed an informal panel of surveyors nationwide who we trust. We are happy to recommend one and instruct them on your behalf as part of our one-stop shop service.
Click here to read more about the importance of appointing a specialist lease extension surveyor
