Category: Guides & Advice, Lease Extension
There are several advantages to owning a leasehold property, such as the maintenance of the building being controlled centrally by the owner of the freehold (or a service management company), but there can also be restrictions that make ownership a less palatable option, such as the shortness of the lease making it more difficult to sell when the time comes.
However, extending the lease can significantly enhance the property's value and marketability, providing a long-term solution that benefits both current and future owners.
Part of the problem might also be in understanding what the various terms for a home purchase or sale mean: freehold, leasehold, commonhold, and share of the freehold.
What is a leasehold property?
From a legal standpoint, the term lease refers to a tenancy, while the leaseholder is the tenant.
Before we get into the process of extending the leasehold, it's worth having a quick look at what each of the types of property that exist on the market:
- Freehold - this is relatively straightforward in that a freeholder is the legal owner of a property, can dispose of it at any time, and is totally responsible for its maintenance and ongoing upkeep.
- Leasehold - technically if you have a leasehold property, which is most often a flat, you don't own it; the question of ownership lies with the freeholder, who owns the ground and the property (or properties) that are situated on it.
- Commonhold - being a commonholder means that you are somewhere between the freehold and leasehold positions. To be in a commonhold property, you would own the property in perpetuity, as would the other dwellers in the units of a block of flats or on an estate. The difference from a freehold or leasehold comes with the unit-holders looking after the agreed shared common ground and utilities together (either as a collective or through a management company).
- Share of the freehold - buying a share of the freehold, also known as “collective enfranchisement”, is established when a group of the leaseholders come together as a collective to own at least part of the freehold of the land and the property (or properties) located on it.
In summary, a lease is a legal document which forms a contract with the freeholder (the landlord) for exclusive rights of possession of the land and designated property for a specified amount of time. For leases that are running for more than seven years - which the majority are - these will legally be registered with HM Land Registry, along with all the associated information covering the lease.
Should I buy a leasehold property?
Before we consider the prospect of extending the lease on a property, let's consider whether a leasehold purchase is the appropriate move in the first place.
What are the factors to think about before buying a leasehold property?
Terms and conditions
When you buy a leasehold property, you must ensure that you understand the limitations of what you can and can't do to your specific part of the building.
While decoration (such as painting walls and ceilings, or wallpapering) will probably be straightforward and should be allowed, there are other changes that must be considered, including any major alterations - these could include replacing doors, fitting a new kitchen or replacing a shower cubicle.
In some instances, the terms of the lease might preclude simple additions like putting up a set of shelves. You'll need to formally request permission from the freeholder before beginning any works and the freeholder may also specify extra fees that you should pay them before any work can be started - going ahead without the requisite permissions may invalidate the provisions of the lease.
Budget
With a leasehold property, there will be costs that you should allow for in the purchase and the subsequent management of the lease throughout your tenure. This might include ground rent payments and charges covering your portion for management services of the building.
Restrictions
Your freeholder may have specific restrictions that they want to apply to their tenants and the tenancy, which need to be factored into your decision regarding your plans for a lease purchase.
The most obvious and frequent stipulations cover subletting (charging someone else to live in the property), whether pets are allowed (which might be specific or general about the types of animals that are not allowed on the property), or disallowing you from running a business from the property.
Short lease
A key question you should consider is how long the current lease has left to run. 80-85 years is the general mark that is considered to be a short lease.
While you may not be considering living there for that length of time, selling the property can be made more difficult if there exists a short lease on it, in part because the new owner will almost certainly have to invest in the process of extending the lease.
Furthermore, you should consider that selling a short lease property will be more difficult and it will likely lose considerable value the shorter the lease has left to run.
Correspondingly, if you have the intention of buying a short lease home with an eye on the price and with a view to extending the lease, you'll likely get a bargain and any extension will make the property far more marketable in the future, making it a possible investment opportunity, too.
Why would I want to extend the lease?
There are three main reasons why you may want to consider extending the lease once you own the leasehold property.
Financial
The shorter the lease on the property, the greater the loss of value when it comes to selling. Since any prospective buyer will be looking at the length of the lease as part of their assessment of risk in buying it, a shorter lease will ramp up the level of risk, which means it won't be an attractive proposition for them, resulting in far lower offers.
In addition, should the lease length fall below 80 years, mortgage lenders are far less likely to want to take the risk of providing a loan to buy it, making it inviable for many prospective buyers.
Ownership
If you allow the lease term to lapse, the ownership of the property will revert to the freeholder, which means you come away from it with nothing.
In large part, this is a throwback to the feudal system that has been in place since the medieval times and, as such, it is anachronistic but still needs to be managed while it is in place.
Ground rent
This is the fee that you, as the leaseholder of a property, will be charged by the freeholder for the right to dwell on the land on which the property has been built. This amount will be specified in the lease agreement but can be changed or reset according to what the freeholder wants.
If the ground rent is unreasonably high, extending your lease may help in agreeing a reduction in the annual cost, particularly since there is provision in the process of extending the release for the ground rent to be reduced to a peppercorn rent (a symbolic value that is notionally low).
Ultimately, going to the expense of extending your lease might be financial viable but it will also give you that peace of mind that you won't be running into trouble later on, particularly when it comes to selling the lease in the future.
It's also worth considering some of the leasehold reforms that are under discussion with the Government currently (at time of writing, October 2024). These are aimed at making the whole leasehold process fairer for the leaseholder, providing a greater balance since the current practice is geared unfairly towards the freeholder's requirements.
How to find out how long the lease is?
If you are the current owner of the lease, the information on lease length should be available in the legal document you signed when taking on the lease. This will only stipulate the length of the lease at the time of you signing it. This means that you can calculate the time left to run by subtracting the elapsed time since you signed the lease from the value determined in the paperwork.
If you are considering the purchase of a leasehold property, you might find out the information from the seller of the leasehold property (or even the owner of the freehold), although this will require a level of trust with respect to the accuracy. There are also online sites which you can use to check the lease length such as Property Checker.
If you own the lease, you can also find out the information regarding the lease and its remaining length by checking with HM Land Registry.
If you are at all concerned about the veracity of the information being provided, you should contact a legal representative, who can work through the various searches to provide the information. If you are planning to buy the leasehold property, the conveyancing process will automatically cover establishing the length of the lease.
It's an important piece of information so that you know whether its worth the expenditure, the time and all the effort required to extend the tenure of the lease. Bear in mind that you will need to pay your landlord a premium to extend the lease and, if that term is currently on a short lease (lower than 80 years) there is an additional cost that will be applied, which is known as a marriage value.
The marriage value is the difference between the value of the lease without extending and how much it is worth after applying the extension. The marriage value is shared equally between the freeholder and the leaseholder, which means that, after the lease is extended, you will be required to pay half of that marriage value to the freeholder.
Therefore, finding out the length of what remains to run on the lease becomes increasingly important to inform the decision you make regarding any extension plans. If you catch the extension before the 80-year threshold, bear in mind that, while you won't have to pay half of the marriage value, the set premium still needs to be paid to the freeholder.
How do I extend my lease?
The process for extending the lease is relatively straightforward with checks and balances in place to guide you.
Check that you have the right to extend your lease.
This should be a simple question to answer: if you have been a leaseholder for more than two years and the lease's tenure is for more than 21 years, you can consider extending the lease.
Inform the freeholderof your intention to commence the process of extending the lease.
This should be established as a formal process, and you should state that you are following the legal route. It's important because then both you and the freeholder are protected by the allowances of the law. If you have an absentee freeholder, then you also have recourse to pursue the lease extension through the courts.
It is for these reasons that you should instruct a conveyancing solicitor who is experienced in handling the affairs of leasehold clients.
Appoint your solicitoras soon as possible.
Your conveyancer can begin the work on identifying the key information and preparing the legal documentation once you have signed them to the task, thereby speeding up the process.
As with any such transaction, it's advisable to research the law firms available, obtaining their fee quotes so that you can make comparisons for the best fit for your needs. And remember that results are as important as the cost of their services.
Instruct a surveyor
You'll need to find a firm of chartered surveyors that has experience in dealing with the vagaries of lease extensions, leaseholds and the local market for such properties.
Appointing such a surveyor with the right background will swiften the process and avoid problems further down the line. What they produce will be an assessment of the value of the leasehold property.
Make a formal offer for the lease extension
As you are now on the road to increasing the length of the lease on your leasehold property, you'll need to complete the various pieces of legal documentation, the primary one being the Tenants' Notice.
But don't worry about the legal steps you need to take - your appointed solicitor will take you through the documentation and the responsibilities that you have in the process.
Pay the deposit stipulated by the landlord
If your landlord requires a deposit to be paid, this will either be set at £250 or 10% of the cost of the lease as stipulated in the Tenants' Notice document.
If the freeholder has demanded a deposit, this money must be paid within 14 days of the signatures being applied to the Tenants' Notice - failure to do so not only sours the relationship, but also means you are legally liable and may lead to financial penalties being invoked.
Again, your solicitor will provide guidance on this matter to ensure any monies are paid at the appropriate time.
Negotiate the price of extending the lease
This can be treated like any other property purchase in many respects, and your solicitor will be able to support you through the process to ensure you establish a fair and decent price for the lease extension to go ahead.
Update the data at HM Land Registry
Because the lease has been extended above the minimum of 7 years for the Land Registry to be interested, your solicitor will provide the necessary information to the authorities so that the lease data and its ownership is kept completely up to date.
Your lease documentation will also be updated to confirm the new length of the lease and the date from which the clock is running. You can use this in the future to provide information in the event of selling your leasehold.
How long does it take to extend the lease?
You have to have owned the leasehold for at least two years to be granted the legal right to request an extension to the lease - note that this covers ownership; you don't necessarily have to have lived at the property all the time. This length of time can be reduced if the freeholder is in agreement for you to initiate the legal process to extend the lease.
Generally speaking, the legal process for extending the lease is straightforward and requires only a small amount of time for it to come to completion.
The greatest amount of time comes from the process of negotiation with the freeholder over price. Without this agreement, of course, the process is subject to inertia. It is therefore in your interests to ensure you have a good solicitor to instigate the legal paperwork as well as the necessary legal enquiries on the property.
The process will also be prolonged if the landlord is absent or can't be tracked down.
On average, the process takes between three and four months, but it can take a year or more depending on the specific leasehold.
How much does a lease extension cost?
Before seriously embarking on the process of extending the lease, you'll want to know how much it is all going to set you back.
And you'll want to keep the costs you can control to a minimum, so it is imperative that you find a quality solicitor to manage the legal aspects of the transaction, who provides value for money for the service they provide.
But as a guide, the cost of the lease extension is dependent on the following factors:
- The value of the property (provided by the surveyor)
- The number of years that remain on the current lease (provided in the current lease agreement)
- The value of the annual ground rent payable (provided in the current lease agreement)
- The increase in value created by any improvements made to the property by the leaseholder (provided by the surveyor)
- Other factors, which include the rate of return on the lease for the freeholder
- The cost of the solicitor's services (provided by the conveyancing firm)
- The cost of the valuation survey (provided by the surveying firm)
- The deposit stipulated by the freeholder (provided by the response to the Tenant's Notice)
Finally, you should also factor in the non-financial costs of your time and energy that needs to be expended on seeing the lease extension through to its conclusion.
Factors such as the ongoing relationship with the freeholder, and the history of on-time payments will come into the decision-making process, too.
A shared ownership leaseholder qualifies for the statutory right to extend their lease only if they own 100% of the property through "staircasing."
However, some landlords may allow lease extensions even if the leaseholder owns less than 100%. It's important for leaseholders to confirm their landlord's specific policy regarding lease extensions.
Will the Government's Leasehold Reform plans help?
The Leasehold and Freehold Reform Act 2024 was one of the last pieces of legislature that was taken to Parliament before the July 2024 General Election, which then saw a different party take control. The Act has received Royal Assent, but the majority of the provisions laid out below are not yet in force and will require secondary legislation before it does.
The result of this is that some or all of the provisions made in the Act might subsequently be changed or even dropped (although that is quite unlikely).
Therefore, the following list should not be taken as the current letter of the law. It can, however, be taken as an indication of the way the rights of the leaseholder might be changing and, perhaps, it might govern your decision to wait until the Act has been full ratified before continuing with your plans to extend the lease.
The provisions of the Leasehold Reform Act are currently these:
Lease extension ease
Make it cheaper and easier for leaseholders in houses and flats to extend their lease and buy the freehold. The current process favours the freeholder far more than the leaseholder.
Lease extension term and ground rent
Increase the standard lease extension term to 990 years, with ground rent reduced to a peppercorn (zero financial value), upon payment of a premium. These can be negotiated currently but this enshrines it in law for all leaseholders looking to extend their lease.
Lease extension and freehold purchase qualifying criteria
Change the qualifying criteria to give more leaseholders the right to extend their lease, buy their freehold and take over management of their building. Again, the current process favours the freeholder to the detriment of the leaseholder; this process makes it fairer to initiate the leasehold extension process.
New home leasehold ban
Prohibit the granting of new leasehold houses (with some exceptions). This means that all new houses built (aside from any detailed exceptions) would automatically be sold as freehold and thereby open up the housing market.
Leasehold terms transparency
Improve the transparency of:
- service charges and give leaseholders a new right to request information about service charges and the management of their building.
- administration charges and buildings insurance commissions.
This is an important objective to allow the leaseholder to identify areas for improvement in what they pay and in the details of the services provided.
Leaseholder legal costs reform
Remove the presumption that leaseholders pay their landlord's legal costs when challenging poor practice and give them a new right to apply to claim their legal costs from their landlord. This provision ensures greater fairness than the current process, which favours the freeholder and ensures the cost of such challenges no longer prevent them from being raised.
Leaseholder redress schemes
Extend access to redress schemes for leaseholders where the freeholder manages the property directly.
Leasehold sale information
Ensure that relevant property sales information is provided to leaseholders in a timely manner. This can only assist in a timely process for selling the leasehold property when it comes.
It's important to reiterate that, as at October 2024, these provisions from the Act have not become law yet, and they are going through further discussions and parliamentary debates. This might result in revisions and changes and should be considered and factored into any plans to extend your lease.
Do you need help for your lease extension?
The experts at Homeward Legal are well-versed in all aspects of the conveyancing process, providing a quality service at a fee that is great value for money!
Call to get your conveyancing quote started, or to discuss your concerns with your plans to extend the lease on your home.