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Owning a leasehold property presents distinct differences from owning a freehold property. When purchasing a leasehold property, you're not acquiring the physical structure or the land beneath it; instead, you're gaining the right to reside in the property under the terms of the lease for a specified duration. You, as the owner, are the "Tenant", and the land owner (usually the owner of the freehold) is the "Landlord".
The remaining length of the lease term holds significant importance, as a shorter term can have various implications for the property, including its valuation, future marketability, and eligibility for securing a mortgage.
How our lease extension solicitors can help you
At Warner Goodman, we specialise in a comprehensive range of services tailored to streamline the lease extension process for both Landlords and Tenants. Please be aware that we cannot represent both parties in the same transaction.
When extending a lease on behalf of a Landlord, our dedicated team excels at crafting all essential lease extension documents. We ensure a seamless and hassle-free experience for property owners.
Our services also extend to Tenants, focusing on approving proposed lease extension documentation. We make sure that your rights and interests are protected throughout the process.
Serving Statutory Notices:
Our expertise extends to serving statutory notices on behalf of Tenants, ensuring compliance with all legal requirements.
We can take care of any counter-notices on behalf of Landlords, effectively resolving any potential issues that may arise.
Mortgage Company Liaison:
If there's a mortgage attached to the property, rest assured we'll liaise with the mortgage company and address all their requirements, ensuring a smooth transaction.
Speak to our lease extension solicitors today
Lease Extensions FAQs
What is considered to be a short lease?
A short lease is generally considered to be less than 85 years remaining. However, some mortgage lenders now require at least 90 years remaining on the lease term, and the Government's Lease Advisory website recommends extending your lease if there are less than 99 years left on the term.
Extending the lease before the term falls below 80 years is crucial to avoid additional costs associated with Marriage Value, payable to the Landlord. Although extending after the term falls below 80 years is possible, doing so comes at a significantly higher expense. Plan ahead to secure your lease with cost-effective foresight.
How do you extend a lease?
In practice, when a lease is extended, a new lease is granted with a new extended term of years but is otherwise subject to all of the provisions of the original lease.
Lease extensions can be made on an informal or formal basis. The informal basis (the non-statutory route) is where the Landlord agrees to extend the lease voluntarily and may agree to change other provisions. The formal basis (the statutory route) is where the statutory right to extend is exercised. Regardless of your chosen path, we can offer comprehensive assistance at every stage.
What are the costs involved in extending a lease?
Usually, a premium is due to the Landlord for the new lease term, although exceptions may apply, such as when the Tenant owns a share of the freehold. Assessing this premium is best handled by a chartered surveyor specialising in lease valuations. Online calculators, like the one provided by the Government's Leasehold Advisory Service (lease-advice.org), can offer a rough estimate. It's important to note that as the remaining lease term shortens, the premium typically increases.
If less than 80 years are left on the term, then something called "Marriage Value" is added to the premium and paid to the Landlord. The calculation of Marriage Value would need to be carried out by a surveyor who specialises in lease valuation, but, in essence, it is 50% of the difference between the combined values of the leasehold and freehold before and after the lease is extended.
You will also be responsible for the Landlord's legal costs, including any valuation fees.
Costs are generally higher if the lease is extended under the statutory route.
What is the Statutory Route for leasehold flats?
The right to extend a lease exists under the Leasehold Reform, Housing and Urban Development Act 1993. To be eligible, you must;
have owned the property for at least two years
own a long lease (over 21 years when granted initially).
This right does not benefit Shared Ownership leases until the Tenant has owned a 100% share for a minimum of two years.
The Act entitles the Tenant to have 90 years added to what is left of the existing lease term at a peppercorn rent (i.e. a zero ground rent). For example, if the present lease had 70 years remaining, the new extended lease would total 160 years with zero ground rent.
To begin the lease extension process, a 'Notice of Claim' must be served to the Landlord (known as a Section 42 Notice). The initial notice must include details of the premium you propose to pay to the Landlord for the extension of the lease. The premium should be calculated by a chartered surveyor who specialises in lease valuations. Ensuring the valuation is correct is particularly important because if the sum is too low, the Landlord will likely reject it and offer their own valuation (at additional cost and delay to you).
The Section 42 notice mandates a response deadline for the Landlord, set to be at least two months from the date of the Tenant's notice. The Landlord's counter-notice options include:
- Admitting the Tenant's right to the new lease and accepting the proposed terms or suggesting alternative terms.
- Rejecting the Tenant's right to extend the lease, with accompanying reasons. In such cases, the County Court will adjudicate on the validity of the Tenant's claim.
- Asserting the Landlord's right to redevelopment. The Landlord may decline to grant a new lease if they can demonstrate to the Court their intention to demolish and rebuild the property. This condition applies only to cases where the remaining lease period is less than five years from the date of the Tenant's notice.
Following the Landlord's submission of a counter-notice, if the price or other terms cannot be agreed upon, there is a set negotiation period of between two and six months. After the initial two months of negotiation, either party can seek resolution through an independent decision by applying to the tribunal.
In cases where the Landlord fails to provide a counter-notice within the stipulated timeframe or neglects to respond altogether, you can petition to the Court for a vesting order. This empowers the Court to grant the new lease based on the terms initially outlined in your notice.
Due to its legal complexities, the statutory route often entails lengthy proceedings which could last several months. Given the intricacies involved, legal expenses are typically higher than the non-statutory route.
What is the Non-Statutory Route for leasehold flats?
If the Landlord is willing to extend the lease voluntarily, this avoids the legal processes required under the Statutory Route.
The length of the new lease term is negotiable, offering flexibility beyond the standard 90 years provided by the statutory route. Landlords may sometimes consent to substantially longer terms, reaching up to 999 years. For reduced premiums, shorter additional terms can be mutually agreed upon.
The non-statutory route offers flexibility in renegotiating lease terms. For example, a Landlord might accept a lower premium in exchange for higher rent during the remaining term. As per the Leasehold Reform (Ground Rent) Act 2022, no ground rent can be charged for the extended term, with a peppercorn rent mandated. However, adjustments to ground rent during the existing remaining term period are permissible.
If there are additional concerns regarding the current lease, the new lease can incorporate revisions if the Landlord consents.
Non-statutory lease extensions typically proceed more swiftly, often taking just a few weeks when all parties cooperate. While the Tenant is still responsible for covering the Landlord's legal fees and other costs, legal expenses are generally lower under this route.
What about houses that are leasehold?
Under the Leasehold Reform Act 1967, owners of leasehold houses have the right to extend their lease, subject to meeting specific criteria. This right entitles the Tenant to an additional 50 years beyond the existing term.
No premium is required when executing the lease extension, but the Landlord can adjust the ground rent to a modern rate for the 50-year extension. This updated rate is typically higher than the current rent, so obtaining a specialist valuation beforehand is advisable. Additionally, the Act grants the right to acquire the freehold, which may often be the preferred option.
Can I sell a flat with a short lease?
It is possible to sell a flat with a short lease, but there are some important factors to consider before listing your property on the market:
- Prospective buyers will likely ask whether the Landlord is happy to extend the lease under the non-statutory route and, if so, at what cost. If the Landlord is not, then, as the law currently stands, the buyer would have to wait until they have owned the property for two years before they would be entitled to extend the lease.
- If the Landlord declines to extend the lease via the non-statutory route, the buyer may request you to serve the S42 notice and assign its benefits to them per the contract terms. This enables the buyer to proceed with the lease extension under the Statutory Route upon purchase, bypassing the two-year ownership requirement. Note that serving the notice will entail additional legal costs for you.
- Obtaining a formal valuation for the extended lease premium is advisable. Typically, if a buyer is interested in purchasing a property with a short lease, they anticipate a reduced purchase price equivalent to the cost of extending the lease post-completion. Having this evidence readily available before marketing can prevent delays if requested by the buyer later.
- If you agree on a price that doesn't account for the remaining lease term, renegotiations will likely occur once the buyer seeks advice from a Conveyancer.
- Most buyers typically anticipate the lease extension to be completed before the sale's finalisation. Frequently, this process aligns with the sale timeline, allowing negotiations and drafting of the extended lease with the Landlord to coincide with the sale's progression. Upon completion of the sale, the premium is paid to the Landlord, and the signed extended lease is finalised simultaneously. This streamlined process is often achievable through the Non-Statutory Route because of its shorter timeframe. Buyers relying on mortgages usually require the lease extension to be completed on or before the sale's completion to proceed.
- You should also consider whether using the open market is the best way to sell a property with a short lease term. You may wish to view an alternative route, such as a property auction.
Potential Changes to the Law - should I wait to extend my lease?
On November 27, 2023, the Government introduced the Leasehold and Freehold Reform Bill to Parliament. The Bill is currently undergoing readings in both the House of Commons and the Lords, with potential modifications anticipated during this process. The exact timing of its passage and its final provisions remain uncertain. However, if enacted, it aims to simplify and reduce costs associated with lease extensions. Key proposed changes include extending standard lease extensions for both houses and flats to 990 years and eliminating the two-year ownership requirement for lease extension eligibility. Additionally, the Bill proposes the removal of marriage value.
If you're looking to sell a property with a short lease, waiting for this legislation to pass might not be possible. The timeline for the Bill's approval is uncertain, and the specific provisions that will make it into the final Act remain unknown until it completes all stages of approval.