Want to know more about Lease Extension? If you own a leasehold property, you own a lease over part of the building. The lease is granted to you by the landlord (the freeholder) who is the person who owns the building and the land the building sits on. You will have a lease agreement that grants you the right to use and occupy the demised premises (your apartment) for a specific period of time.
If there are less than 85 years remaining on the lease, it will be more difficult to obtain a mortgage and therefore, harder to sell the property. In these circumstances you may want to consider a lease extension, a lease extension calculator will provide you with a general estimate of the premium you will pay for extending your lease.
UK Lease Extensions: The length of your lease is a significant consideration when purchasing property
- Short leases (under 85 years) are hard to sell
- Short leases (under 85 years) have less value and are harder to mortgage or re-mortgage
- Leases are a wasting asset; when they expire they have no value
- A lease extension protects your property against erosion by time and safeguards your investment
- An extended lease is usually at nil (a peppercorn) ground rent
- The longer you leave it, the more expensive a lease extension becomes, increased costs rising year on year
- If a lease has less than 80 years remaining, it will be more costly as there is a “marriage value” consideration
What is the process of extending a lease?
The process you need to go through to either extend a lease is called Leasehold Enfranchisement. Under the Leasehold Reform, Housing and Urban Development Act 1993, leaseholders have the right to extend their lease, subject to qualifying criteria.
The Act provides the leaseholder with the right to extend their lease by a term of 90 years and extinguishes the ground rent; this is known as a statutory lease extension. Before introducing the Act, a Freeholder could demand a premium for the extension at its discretion or refuse a lease extension altogether.
As the remaining years of the lease reduce, so does the value of the Leasehold property. Additionally, as the remaining lease term gets shorter, the premium payable to extend the lease increases.
To extend a lease, you need to be a qualifying leaseholder, which means the following:
- You have owned the long lease for more than two years
- The lease is a long lease – which is a lease that was initially granted for more than 21 years
However, you will not be a qualifying leaseholder if:
- The landlord is a charitable housing trust, and the apartment is provided as part of the charity’s work
- It is a business or commercial lease
If you qualify, you can serve a Section 42 notice on a ‘competent landlord.’ A competent landlord is a landlord whose interest in the property is long enough to grant a 90-year extension – i.e., their interest is longer than 90 years.
In most cases, the immediate landlord will be the freeholder, and they are the obvious person to serve your notice to. However, there will be cases when the immediate landlord has an intermediate lease that is too short to grant a 90-year extension. This will not prevent you from extending your lease, but you will need to identify a competent landlord who has enough interest to grant the extended lease.
In most cases this will probably be your immediate landlord if they are the freeholder or a head leaseholder with a lease which is at least 90 years longer than yours. However, in some cases, your immediate landlord may be a head leaseholder with a lease that is only a few days, or a few years, longer than yours. If this is the case, you need to identify the landlord who has enough interest to grant you the new lease.
To determine the competent landlord, you will need to know the details (especially the length of their leases) of any intermediate landlords who may be between you and the freeholder. You may already know some of this information, and you can get the rest in several ways, including those set out below.
The Landlord and Tenant Act 1985 (the 1985 act) – Under this Act, you have the right to details of the name and address of your landlord. You can ask for this information, and it must be provided within 21 days. It is an offence to not provide these details if you ask for them. These details should also be on your ground rent and service charge demands. A problem here is that your immediate landlord may not be the competent landlord for the purposes of the Act.
Land Registry – As long as the property is registered (most are) you are entitled to inspect the register and to receive copies of the entry relating to the freehold of your property. The entry will provide the name and address of the registered owner and details of any other interests in the freehold, including head leases and mortgages. There is a fee for copies of the register.
Information notices – section 41 of the 1993 Act gives you the right to serve notices on your immediate landlord, the freeholder (if different) or any other person with an interest in the property to ask for details of their interest. This information would include the name and address of the freeholder or intermediate landlord, the length of the lease and details of the property the flat is in.
People and companies who receive the notices must respond within 28 days. Serving information notices does not formally start your application for the new lease or commit you in any way, and you will not become liable for any costs as a result of serving these notices.
If, after all reasonable efforts, you cannot find the landlord, this should not prevent you from applying for a new lease. If the landlord is a company that is in receivership, you can serve the tenant’s notice on the receiver. If the landlord is an individual who is bankrupt, you can serve the notice on the ‘trustee in bankruptcy’. Both the receiver and the trustee are acting as landlord for the time being and, under the 1993 act, they must serve a counter-notice and grant the new lease.
If you simply cannot find the landlord, you cannot serve the tenant’s notice. In this case, you can apply to the county court for a ‘vesting order’ to extend the lease. If the court is satisfied that you are eligible for a new lease, it will grant the lease to you in the landlord’s absence. The court will usually refer the case to the tribunal to decide how much the premium should be.
Section 42 Notice
After establishing that you qualify to be able to extend the lease, you will need to appoint a surveyor and solicitor who specialise in Leasehold Enfranchisement. The solicitor will be able to investigate whether you and the building qualify pursuant to the Act in the first instance and the surveyor can provide an opinion on the likely premium to be paid for a lease extension.
Under section 42 of the 1993 act, the tenant has the right to issue a Tenant’s notice to the Competent Landlord requesting an extension to the lease. The Tenant’s Notice (referred to as a Section 42 Notice) must contain the following:
- The Tenants full name and the address of the apartment or flat
- Enough information about the flat to identify the property the application relates to
- Details of the lease, including its start date and the number of years for which it was granted
- The premium the tenant is proposing for the new lease or other amounts they are proposing to pay if there are intermediate leases involved
- The terms proposed for the new lease (if different from the present lease)
- The name and address of the tenants appointed representative (if they have appointed one)
- The date by which the landlord must give their counter-notice, which must be at least two months from the date of the tenant’s notice
Note: The premium quoted in the notice may not be the price that is eventually agreed following the tribunal’s decision or negotiations with the landlord, but it will be the figure the landlord uses to calculate the deposit they will ask for. The premium proposed must be a genuine opening offer. If the offer quoted is not a genuine offer in order to reduce the deposit, the notice may not be valid.
It is likely that a landlord will request payment of the statutory deposit once the notice is served. This will be either 10% of the premium quoted in the initial notice or £250, whichever is greater.
Assessing the Premium for the Lease extension: Lease extension calculator
The law does not say that a full valuation must be undertaken in order to apply for a new lease. Valuation is not an exact science, and it will be virtually impossible for the surveyor to provide an accurate estimate of the final extension figure. The surveyor will likely be able to provide a ‘best and worst’ figure, valuing the lease extension from both tenants and the landlord’s perspective.
They will also use their experience of properties in the local area to anticipate claims the landlord might make. There is no such thing as a definite, fixed price for a new lease and you should be aware from the beginning of the process of the likely range within which the price will be settled, so you are not surprised at a later stage.
When considering how much the premium is likely to be, you should also bear in mind that you will be liable for the landlord’s costs. The eventual cost of the new lease will be the premium, plus both your own and the landlord’s ‘reasonable’ legal and valuation costs (not including any costs which arise in connection with proceedings heard before a tribunal).
The Leasehold Advisory Service is government funded and provides independent advise for residential leaseholders. Their website includes a Lease Extension Calculator which provide you with a general estimate of the premium for a lease extension for a flat. It is based on data available on a national level and does not take into account local factors that may impact on the premium.
Terms of the new Lease:
- You should be aware of the legal requirements for the terms on which the new lease can be granted. These are as follows.
- A peppercorn rent (that is, no ground rent) will be charged for the whole of the term (the 90-year extension plus how long is left on the current lease).
- The new lease must be on the same terms as the existing lease, apart from minor modifications and certain exclusions and additions that are allowed by law.
- Modifications – to take account of any alterations to the flat, or the building, since the existing lease was granted (for example, to gas lighting or coal stores), or to correct a problem with the lease.
- Exclusions – since the 1993 act provides a right to continuously renew the lease, any existing clauses relating to renewing the lease or ending it early, or the landlord’s right to buy the flat if you decide to sell it, should be excluded.
- Additions – a requirement not to grant a sublease which is long enough to give the subtenant the right to a new lease under the Act.
Lease Extension Procedures and Time Limits
Once a valid section 42 Notice is served a strict timetable is triggered. Instructing specialist advisers will mean your interest is safeguarded.
- You serve an information notice under section 41 of the 1993 act. (You do not have to serve an information notice.)
- The landlord must respond within 28 days.
- You serve a tenant’s notice under section 42 of the Act.
- The ‘valuation date’ will be fixed as the date you serve the tenant’s notice.
- The landlord can ask for extra information, but they must do so within 21 days of receiving the tenant’s notice.
- You have 21 days to provide any information the landlord has asked for.
- The landlord must serve a counter-notice by the date stated in the tenant’s notice. This date must be at least two months from the date you serve the tenant’s notice.
- If the landlord does not serve the counter-notice by the date stated in the tenant’s notice, you must apply to the court for a vesting order within six months.
- After the landlord serves a counter-notice, you or the landlord can apply to the tribunal for an independent decision. You must do this no sooner than two months from, but within six months of, the date the counter-notice is served.
- The fee for applying to the tribunal is £100, and the hearing fee (once you receive notice of a hearing date) is £200.
- The tribunal’s decision becomes final after 28 days. Suppose you disagree with the tribunal’s decision. You can appeal to the Upper Tribunal(Lands Chamber) before the decision becomes final, but only if you have the tribunal’s permission.
- After the tribunal’s decision becomes final, you and the landlord have two months to enter into the new lease.
- If you and the landlord do not enter into the new lease within two months of the tribunal’s decision becoming final, you have a further two months to apply to the court to order the landlord to meet their obligations.
Lease extension can be a difficult and complicated process. You should always seek professional help from a solicitor and surveyor to assist and advise you.
Important notice: Proptech Pioneer and its associated companies seek to provide investors with guides, information, and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, accountant conveyancer, lawyer, financial advisor, or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision.