What is a lease extension?
A lease extension refers to the process through which leaseholders can prolong the length of a lease beyond its original term. This blog post focuses on leasehold flats and although dealt with under separate legislation, many of the practical points also apply to leasehold houses.
A lease extension can refer to informal lease extension – where the terms of the extension are negotiated informally with the landlord – or a statutory lease extension pursuant to the provisions of the Leasehold Reform Housing and Urban Development Act 1993.
Why extend your lease?
Leases of flats are usually granted for a term of at least 99 years. Some are longer, for example, 125, 200 or even 999 years. Over time, the remaining term left on the lease decreases. This can affect the value and marketability of the flat.
Extending the lease therefore helps to maintain or enhance the value of the flat, and makes the property more attractive to potential buyers or mortgage lenders.
Can any tenant of a flat extend their lease?
To claim a statutory lease extension the tenant must have owned the flat for at least two years, calculated from the date of registration at the Land Registry.
Subject to certain exceptions, most other flat leases originally granted for a term of more than 21 years are eligible to be extended under the statutory process.
There are no strict qualification criteria for an informal lease extension; many landlords still require the tenant to be eligible for a statutory lease extension before agreeing terms informally.
How long can the lease be extended by?
Under the statutory process, the tenant is entitled to a further 90 years added to the remaining term of the existing lease. As such, if there are 85 years remaining on the lease when it is extended under the statutory process, the extended lease will be for a term of 175 years. It is not possible to claim more, or less, than a 90-year extension under the statutory process.
Under the informal route, any length of extension can be agreed between the parties. For example, the lease could simply be ‘topped back up’ to it’s original term, or extended to 999 years.
What happens to the ground rent?
Where a lease is extended under the statutory process, the ground rent is reduced to a peppercorn (i.e. nil) for both the remainder of the term of the original lease, and for the extended portion of the lease.
Accordingly, exercising the right to a statutory lease extension can also be a useful way of overcoming onerous ground rent provisions in an existing lease.
Where a lease is extended informally, the ground rent payable for the remainder of the term of the original lease must not exceed the rent that would otherwise have been payable, and the extended portion of the lease must be at a nil ground rent.
Neither route has any impact on the service charge or insurance rent payable in respect of the lease.
How much does it cost?
There is a complicated formula for determining the price payable for a lease extension. It includes various factors, such as the value of the flat, the amount of time left on the lease and the ground rent. As some of the figures used in the formula (such as the value of the flat) can be subjective, the formula can produce a range of prices.
The tenant should obtain a valuation by a specialist surveyor before agreeing terms with the landlord (informal route) or making a statutory claim (formal route). The surveyor should also be able to advise on the likely maximum cost of the lease extension.
The price of a lease extension can be significantly higher if the claim is made when there is 80 years or less left on the lease. As well as the premium payable for the lease extension, the tenant is also responsible for their own, and most of the landlord’s, legal and surveyor’s costs. An online lease extension calculator may give a rough initial estimate of how much a statutory lease extension is likely to cost.
How long does it take?
A lease extension using the statutory process is not generally quick. It can take six to twelve months to complete, depending on how long it takes to agree terms with the landlord.
An informal lease extension can be quicker to complete; one disadvantage over the statutory route is that any mortgage lender will have to be a party to the transaction.
Should the lease be extended before the flat is sold?
There is no requirement to extend the lease before selling, but the term remaining can affect the sale price. If the lease has 80 years (or less) remaining, the price may be significantly affected and the pool of potential buyers may be restricted due to a more limited availability of mortgage finance.
Depending on the circumstances of the transaction, a tenant may wish to complete a lease extension before they sell. Alternatively, it may be possible to make a statutory claim and sell the flat simultaneously, so that the buyer completes the lease extension and pays for it. This has the benefit of allowing the buyer to proceed with the lease extension as soon as they purchase the property, rather than waiting for two years from becoming the registered owner before they can start their own claim.
Is it worth waiting for the law relating to lease extensions to change before pursuing a lease extension?
The government has outlined proposals to make it easier and cheaper for tenants of flats to extend their leases, and indeed the Freehold and Leasehold Reform Act 2024 received Royal Assent on 24 May 2024.
The Act includes a right for tenants to extend the leases of their flats by 990 years (rather than 90 years) and simpler ways of calculating the premium payable to reduce the professional costs associated with doing so. However, there is no timescale for the changes to come into effect, particularly in light of the upcoming general election. It could be years before the new provisions come into effect, if at all.
Whether a tenant should extend their lease now or wait in the hope that changes in the law will be implemented depends on various factors, including the number of years left on the lease and whether they plan to sell the flat in the near future.
Next steps
If you would like to instruct one of our experts at Fisher Jones Greenwood to assist you with a lease extension, or if you would like some further information before deciding whether or not to proceed with a lease extension, please contact our Commercial Property team; Leon Pascal [email protected] or Sarah Shea [email protected] or call 01245890110.
Disclaimer: This guide provides general information and should not be considered legal advice. Always consult a qualified professional for personalised guidance based on your specific circumstances. The contents are based on the law as at the date of publication.