It is likely you will need a lease extension if the term remaining on your property lease falls below 85 years. As the lease becomes shorter than this, gradually it will become less valuable. Once it drops below 80 years the value starts to drop more quickly, meaning the cost of extending it will start to rise more quickly. Also, the flat will become harder to sell, because potential purchasers will struggle to obtain mortgage finance.
If you own a ‘share of freehold’ along with the other flat owners in your building, this might not matter too much. The management company may agree to grant a lease extension without charging anything other than its legal fees.
Fortunately, your lease can be extended by exercising your statutory rights under the Leasehold Reform (Housing & Urban Development) Act 1993. We call this a statutory lease extension. Almost anyone who owns a leasehold flat can obtain a statutory lease extension, the only significant qualifying criterion being that you must have owned the flat for at least 2 years. You may also be able to agree a voluntary extention with your landlord/freeholder. Both options are considered below.
What is a statutory lease extension?
The owner serves a statutory “section 42 Notice”. This entitles the owner of a leasehold flat to a ‘new’ lease which replaces their existing lease on the following terms:
- the term will be extended by an additional 90 years;
- the ground rent will be reduced to zero (or a peppercorn, if demanded!);
- otherwise the terms of the existing lease will continue to apply to the new extended lease, apart from the addition of some statutory clauses required by the legislation.
NB sometimes the landlord, or you may want to improve the terms of the existing lease. If there are defects or major problems with the lease, or the leasehold structure in the building, you or your landlord/freeholder have the right to require these be corrected.
What does it cost to obtain a statutory lease extension?
- The Premium. As the freeholder/landlord will be compelled to extend the lease, the legislation ensures they receive compensation for that ‘loss’, in the form of a premium that must be paid by the leaseholder in return for getting the lease extended. If the parties cannot agree the amount, it will be decided by the First Tier Tribunal (Property Chamber). The premium is calculated by reference to a statutory formula and in almost all cases we recommend you be represented by a surveyor with specific expertise in this type of valuation.
- Your costs. There are a number of traps in the legislation which can lead to your section 42 Notice being invalid, or deemed withdrawn if you do not comply with various statutory deadlines. It is recommended that you use a solicitor with experience of this tricky area. As such you should budget to incur legal costs for following the statutory procedure, and the conveyancing of the ‘new’ lease.
- The landlord’s costs. One of the downsides from a flat owner’s point of view is the fact they have to pay towards their landlord’s legal and surveyor costs of responding to their statutory notice. You will also have to pay towards their conveyancing costs. However you do NOT have to pay towards their legal costs if you apply to the Tribunal. This should incentivise the parties to negotiate sensibly.
How long does it take to extend the lease?
A statutory lease extension takes many months from start to finish – a minimum of six months is usual from the point the claim notice is served, but more commonly it can be double this.
- You first need to obtain your own valuation and make sure the funds will be available.
- In your section 42 Notice you must give the landlord at least 2 months to respond.
- Once the landlord’s section 45 Counternotice is served, there is a further 6 month period for negotiations. During the first 2 months neither party is permitted to apply to the Tribunal. In the following 4 month period either party can apply to the Tribunal, at any time. Often agreements are reached without needing to apply, but usually this happens close to expiry of the deadline.
- If you have to apply to the Tribunal, there is still time to negotiate. But the Tribunal will hear the application usually within a further 3 to 5 months.
- If you agree the Terms of Acquisition during the negotiating period, there follows another 4 month period in which the ‘new’ lease must be completed. This is usually ample time but complications can arise if either party wants to introduce changes to the lease wording.
What are my other options for a lease extension?
It is possible to negotiate a ‘voluntary’ lease extension. This is a lease extension agreed through negotiating directly with your landlord/freeholder, without going to the trouble of serving a statutory notice. The potential benefits are attractive:
- The new extended lease could be in place in a matter of weeks rather than months;
- Costs could be saved by avoiding the cumbersome statutory procedure, and its traps for the unwary;
- There is greater flexibility – if the parties agree, the lease could be extended by a different number of years than the 90 years fixed by the legislation. In addition, the ‘new’ extended lease could still provide for ground rent to be payable, and in theory this could be increased to reduce the premium the lessee has to pay.
However the voluntary approach comes with its own pitfalls, and it can be a minefield:
- There is no guarantee you will get a lease extension. The landlord could simply say no.
- The landlord might ask you to pay their costs of taking valuation and/or legal advice to enable it to respond to your request for a lease extension. You may be better off serving a section 42 Notice in these circumstances.
- The lessee has very little bargaining power. The landlord could take a ‘take it or leave it’ approach to the negotiations, and doesn’t have to listen to reason as regards what is a fair price to pay for the lease extension.
- Until the ‘new’ extended lease is put in place your current lease is still getting shorter. You could spend several months in negotiations before deciding to serve a statutory notice instead. By then the lease will be shorter and the premium will be slightly higher as a result.
It is almost always worth making an informal approach to the landlord to request a voluntary lease extension, because this could save you time and money. However, it is essential to keep progress under review in the negotiations, to ensure you do not lose out due to any delay.
Beware if the landlord asks you to pay their costs before engaging with you. We recommend you think very carefully beforehand: even though the statutory procedure is slow and often involves higher professional fees, you have a more balanced negotiating position, plus a guarantee of a lease extension at the end of it. Paying money upfront to the landlord could give you the worst of both worlds – you are paying your landlord its costs, but you have a weak negotiating position. Under the statutory extension procedure the landlord will know that you can take it to the Tribunal, which should be an incentive for the landlord to negotiate sensibly.
The choice of your surveyor is also very important. You should seek out a specialist surveyor, with experience of justifying their valuations before the Tribunal. Although there is a statutory formula for calculating the lease extension premium, there is considerable scope for variation of the figures that go in to the formula, which can lead to big differences in opinion, depending on whether the surveyor is acting for the owner of the lease or the owner of the freehold/landlord.