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Extend your lease
As a residential long-leaseholder, you probably know of your statutory right to extend your lease by 90 years and extinguish the ground rent. That right is granted to you by the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act). But you may be unaware that you and your landlord can also voluntarily agree on a lease extension rather than going down the statutory route.
Why should I extend my lease?
The shorter a property’s lease, the lower its value. And it may surprise you to hear that a residential lease with less than 80 years to run is known as a ‘short lease’. However, a property with a short lease is more difficult to mortgage as the declining value makes it less attractive as security. Consequently, finding a buyer will also be more of a challenge. Indeed, these issues may begin to materialise once the lease term reaches 90 years.
In addition, when the lease term drops below 80 years, a leaseholder must pay ‘marriage value’ when extending their lease. Marriage value is the increase in the property’s market value resulting from the lease extension. As this inevitable ‘profit’ only arises from the landlord’s obligation to grant a new lease, the law requires the parties to share it equally.
For all these reasons, in most cases, it’s crucial to extend your lease in good time and certainly before the term drops below 80 years.
Statutory lease extension
A statutory lease extension under the 1993 Act gives you a 90 year extension to your remaining lease term. So, for example, extending a lease with a remaining term of 85 years creates a new lease with a term of 175 years. In addition, extending the lease resets the ground rent (if any) to a peppercorn (essentially zero) for the duration of the lease.
However, there are strict timelines to adhere to. Details of the process are available on our Lease Extension page, but in brief:
- First, a surveyor estimates the premium payable for the lease extension based on a formula contained in the 1993 Act.
- Your solicitor sends details of the premium to the landlord in a Section 42 notice.
- The landlord has two months to serve a counter notice accepting or rejecting your right to extend. If the landlord accepts your right, they must also confirm whether or not they accept the premium.
- If the right to extend is agreed but the landlord disputes the premium, you must both go to Tribunal to resolve the dispute. Unfortunately, that can be time consuming and costly.
Remember, you must also pay the landlord’s legal fees, the surveyor’s costs, and your own legal costs.
Voluntary lease extension
The more informal route first involves you and your landlord negotiating the terms of a lease extension. Once terms are agreed, your landlord’s solicitor drafts the new lease extending the term based on your agreement. Once approved and completed, your solicitor registers the new lease at the Land Registry.
An advantage to the voluntary route is that there are no rules. So, the new lease term, rent and liability for costs are whatever you and your landlord agree. If both parties adopt a constructive approach, a voluntary lease extension can prove both quicker and cheaper than the more formal process. And if you cannot agree terms, you can still consider the statutory route.