A guide to Leasehold extensions

Lease approaching an 80-year unexpired term?

Extending your lease on a leasehold property may seem like an unnecessary expense, or something that you can simply put off, but by leaving your lease renewal you could end up paying much more. Renewing your lease gets more expensive every year you leave it, and while this may just be a matter of a few hundred pounds at first, once you drop below 80 years, you could see a substantial increase. For example, a flat with 81 years left on the lease may cost around 20% more if you leave your renewal until you only have 79 years left on your lease.

Letting your lease run below 80 years could also a have negative impact on your mortgage options. Lenders now have much stricter criteria when it comes to properties with short leases, and in some case may alter their interest rates depending on the number of years you have remaining on your lease.

If your leasehold is approaching the 80-year deadline, it’s best to look at extending your lease as soon as possible. A specialist valuer report to determine the likely cost of the premium will cost you from £725 plus VAT, however, as the leaseholder, you will also be liable for the landlord’s “reasonable” legal and valuation costs as well.

The dangers of informal lease extensions

Accepting a non-statutory or informal lease extension from your Freeholder may look like a bargain but in reality it is just a way for an unscrupulous Landlord or Freeholder to dupe you out of as much money as possible.

Once you have owned your flat for a period of two or more years, you are legally entitled to extend your lease by up to 90 years and reduce your ground rent to zero. However, you are also legally obliged to compensate the Freeholder in three different ways:

  1. Ground rent – The total amount of ground rent you owe to your Freeholder for the years remaining on your lease, calculated in today’s money
  2. Reversion – The amount you would have to pay your Freeholder for the remaining years of your lease, paid as a lump sum with an equivalent compound interest rate of 5%, for example
  3. Marriage value – Only applicable if you extend your lease after it has fallen below 80 years, and is calculated on the increase in value the property will see now the lease has been renewed.

Once you have made these payments, your statutory legal rights permit you to renew your lease and extend it to 165 years, you will also no longer have any ground rent to pay. In addition, it will be another 85 years before the lease needs extending again, at which point it will be very cheap since ground rent won’t be included in the calculation.

While most Freeholders are honest people, there are, of course, those who want to make as much as possible from renewing a leasehold. This can be done by offering an informal renewal, which at first glance can look very appealing, but in the long run will guarantee large profits for the unscrupulous Freeholder and very little legal standing for you to do anything about it. Since it is in their best interest for you to agree to an informal renewal, some Landlords may try to pressure you into accepting one by misquoting the law. This is not the case, and your statutory rights guarantee you a formal renew, so make sure that is what you get.

A section 42 notice, your legal right to extend your leasehold

Before serving a section 42 notice to your Freeholder, you will need to have a surveyor conduct a valuation of your property. Your solicitor then contacts your Freeholder to communicate the premium that you are willing to pay to extend your lease.

Your Section 42 notice should be served in person to avoid any dispute over confirmation of receipt. Once received your Freeholder has two months to issue a Counter Notice to either accept or reject your claim, and if necessary state the lowest figure they will accept. There then follows a further two-month period for your surveyor and your Freeholder’s surveyor to discuss, negotiate and conclude the premium to be paid.

Serving a Section 42 notice allows you fix the valuation date, as well as to make application to tribunal, if your Freeholder is being unreasonable.

Leasehold extension advice in Surrey and Guildford

At Perry Hill Chartered Surveys, we have extensive experience dealing with lease extension and have acted for both Freeholders and Leaseholders, acquiring the most equitable deals. For any advice or guidance on lease extension process, please contact us on 01483 237333 or contact us here.

You can also read more information on negotiating lease extensions and the cost here.