Lease Extension

introduction

Leasehold is a common form of property ownership in the UK. Flats (apartments) are typically sold on a Lease which is why leasehold is the predominant form of property ownership within densely populated cities such as London. Flat leases are originally granted by the owner/developer of Building (the "Freeholder") typically for a term of 99 or 125 years. Many owners of this type of Leasehold properties are seemingly unaware of the importance of maintaining the length of their lease, mistakenly believing that the term only serves as the length of occupancy. However in reality, it is important because a short lease will become difficult if not impossible to sell. Most Mortgage lenders as a strict policy will out-rightly refuse to finance the purchase of leases that have fewer than 75 years left to run. If purchasers cannot borrow money to purchase the flat, it means that the leaseholder is effectively reducing their potential market to 'cash-only' buyers which due to lack of competition results in a much lower sale price being achieved.

Moreover, the purchase price of a lease extension (otherwise referred to as "the Premium") will exponentially cost more the shorter the lease becomes, which is due to how the law calculates such compensation, so extending sooner will save the leaseholder money in the long run.

There are two distinct ways that a lease extension can be achieved. Either:

the Landlord and Tenant reach a voluntary agreement between themselves as to what the extension terms will be. This is known as an "informal", "voluntary" or "non-statutory" lease extension.

Alternatively, the Tenant could exercise their legal right to claim a lease extension from their landlord, whereby those terms are determined by the laws prescribed within the Leasehold Reform Housing and Urban Development Act 1993 (the "1993 Act") this is  known as a "statutory lease extension".

What is the average cost of a lease extension?

This is one of the most common lease extension questions asked, but the answer is highly variable. Most significantly the purchase price for it ('the Premium') is determined by how short the lease currently is.

Since most leaseholders extend their leases when their leases have approximately between 80 and 100 years remaining, Premiums are often in the region of £3000 to £10,000 range (assuming average priced property).

The amount of compensation paid in exchange for the extension is also dependent on what method you are using to extend your lease. For example, for the statutory method, the terms and price are set by law and the leaseholder is buying an additional 90 (ninety) years being added.  Whereas, by contrast, in an informal arrangement it remains open for leaseholders to reach a purely discretionary agreement with their Landlord, which allows for an option to purchase fewer years at a reduced price.  If you have been offered such an offer from your Landlord, it is worthwhile to compare this to what would be available under the statutory regime.

We would invite you to use our Lease Extension Calculator as a general guide, however we would generally recommended that you seek expert valuation advice from a Chartered Surveyor that specialises in this field.

We have such Surveyors on our membership panel, so please contact us to be put in touch.

Am I legally entitled to extend my lease?

As discussed above, there are two possible methods to extend.  The informal method is not underpinned by any qualifying criteria; the Landlord is free to simply agree a discretionary deal with you, should he or she wish it.

However, if it is intended to extend under the statutory regime, there is such a qualifying criteria.

Most significantly, this right only exercisable in the case of :-

  • residential long leases (originally granted for longer than 21 years), and
  • the leaseholder having owned the property for at least 2 years prior to making their claim.

There are other aspects that come into the question of qualification, for example, Charitable Housing Trust Landlords in which the flat forms part of housing accommodation for its charitable functions, is exempt from such statutory lease extension claims.

Interestingly, there was much speculation concerning whether shared-ownership leases that had not yet 'staircased' (bought more shares of the asset) to 100% were disqualified from making such claims. However there has been some recent case law that shows that such leases do indeed qualify. We shall create an article on this subject matter in due course.

WHICH ROUTE DO I CHOOSE? Informal or Statutory?

This is another common lease extension question posed by Leaseholders. Unfortunately there is no simple answer to this one because one size does not fit all, as it depends on the circumstances in question; there are arguably pros and cons with each. In a nutshell, the informal method is quicker and allows greater flexibility in its terms, whereas the statutory method while most restrictive, provides greater certainty and therefore assurance to the leaseholder.

For more information about this, see our Lease Extension FAQ section

One must also consider that this will not always be an option by the leaseholder since there are times in which either route may not be readily available. For example the Landlord may not be open to reaching a voluntary agreement with you. Local Authority Landlords are a perfect example of this, as their policies dictate that they will only grant formal extensions upon receiving statutory claim notice.

In other cases it may be that the leaseholder does not qualify for a statutory lease extension as, for example, a leaseholder must have owned the property for at least two years prior to claiming this, and perhaps they bought the short lease property without considering this qualifying time frame. Incidentally, it is possible for a vendor to commence the statutory claim procedure and have this a transferred to the buyer in conjunction with their purchase - thereby bypassing this waiting period. This is called assignment of the lease extension claim, and it involves the buyer and seller signing a particular type of legal document that brings effect to a transfer of the entitlements and liabilities between one owner to the next after the lease extension claim has commenced.

Another point highly worthy of mentioning is that within Parliament there have been recent reforms and there will be more upcoming. One such reform is the abolition of Ground Rent which currently applies for all new leases, even informal types. This change has already had an impact on the incentives for landlords to enter into informal extension arrangements, since they can no longer seek an increase to the ground rent.  The Leasehold and Freehold Reform Bill is also set to remove the 2-year ownership requirement as referred to earlier, as well as abolish the requirement to pay 'marriage value' (which is a component that effects leases that have fewer than 80 years, which inflates the Premium payable).

For more information, please read our FAQs:-

Is A lease extension difficult?

Not usually; and this is due to the fact this it is a leaseholder's statutory right to be entitled to an extension under the Leasehold Reform Housing and Urban Development Act 1993.  This means that the Landlord cannot oppose your claim providing you do indeed qualify under the criteria and that when you make your claim, it does not stray from the mandatory requirements as set out in the law (it is not defective).

The shorter a lease becomes, the more valuable it is to the Landlord. For this reason, it can be said that lease extensions are adverse to a Landlord's interests despite that they will receive a lump sum of money in exchange for the extension.

Since Landlords stand to gain the longer it takes for leaseholders, they may be inclined to either stall leaseholders from claiming extensions, or if the lease extension has been defectively brought, they may try to avoid it on a technicality.

It is for this reason that it is crucial to use a specialist solicitor to undertake your lease extension claim.

Contact us today to be put in touch.

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