A lease extension is the continuation of a lease agreement beyond the original term. Most residential flat owners have the right to extend their leases for a number of years, so long as they meet all the criteria.
Extending a lease is valuable and therefore should be applied for sooner rather than later. Below are our top ten tips to help guide you on your way.
Should you need more information Currell Commercial also have a team of expert Chartered Surveyors to help with any queries.
Generally the shorter the lease the more expensive it is to extend. Anyone with a lease approaching 81 years unexpired should seriously think of extending it. Under 80 years, marriage value is payable to the landlord, making it much more expensive to extend the term. Don’t forget, the lease runs from the commencement date on the lease, not when it was purchased and not the date when the lease was granted – so let’s say if it’s a 99 year lease and you bought it in 2005, 15 years after the lease was drawn up in 1990, then the lease expires in 2089 – leaving 82 years to run. Now is the time to act to leave enough time and avoid paying the extra marriage value to the freeholder.
You must have owned your flat for two years. It doesn’t matter if you haven’t been in occupation. The original lease needs to be long (over 21 years) and it should be residential, as opposed to commercial use.
The legislation does not apply to some landlords such as the Crown, National Trust and charitable housing Trusts, although the Crown usually complies with the principles of it.
You will need to instruct a solicitor who will start the process by serving an Initial Notice on the landlord, which will offer a premium for the lease extension. Some of the stages in the process of extending a lease have strict time limits. It is very important to instruct a solicitor who is familiar with the legislation. Contact the Law Society for a recommendation and get a written quote first.
You will also need to instruct a valuer, probably a chartered surveyor, to put a value on the lease extension. He will use the valuation formula in the Leasehold Reform Housing and Urban Development Act 1993, as amended. Contact the RICS for a list of local surveyors who specialise in lease extensions. Get a quote in writing first.
Most surveyors will charge a fixed fee to prepare the initial report that will avoid hidden extras and disbursements. This fee should cover the initial inspection of the property, reading the lease and making all the calculations. Obviously there are extra charges if the surveyor is asked to negotiate with the landlord or their estate agent or for any further work required if the valuation cannot be agreed. If they act for several flats in the same building they can usually offer substantial discounts so it’s probably a good idea to team up together, if several of you are going down this route.
The owner of the freehold will be given at least two months in which to respond to your offer and if he/she does not, then you can apply to the County Court for an order that the lease extension be granted on the same terms set out in the initial notice. Usually the Counter Notice is served in time and a period of negotiation follows between the parties or their respective surveyors. If you cannot agree a valuation then you can end up in the Leasehold Valuation Tribunal but this is quite unusual. An application to the Leasehold Valuation Tribunal must be made by the flat owner (i.e. the lessee) no later than six months from receipt of a valid counter notice, failing which, if the premium cannot be agreed within the six month window, the initial notice is deemed withdrawn. This means that the lessee will have to pay the landlord’s reasonable legal and surveyor’s fees in addition to his/her own costs and wait for a further 12 months before being able to make a fresh claim under the Act. This will be costly for the lessee, especially if waiting a year results in the lease term dropping below 80 years! If you meet the criteria then by law the freeholder cannot prevent you extending the lease.
Once the Initial Notice is served on the landlord you will be responsible for his/ her reasonable valuation and conveyancing costs, as well as your own. The Notice is also important in setting the valuation date.
Under the Act you are entitled to a further 90 years on your lease with no ground rent payable on the original term or extension, which is incorporated within the cost of extending. You still have to pay the service charge under the lease terms.
Although there are costs involved, the upside is that after the lease extension, your property will usually be more valuable and saleable should you want to sell or re-mortgage. Buyers are often put off by short leases and mortgage companies won’t generally loan on properties with leases shorter than 60 years, although the exact cut-off varies.
If we take a London property, valued at £325,000 with about £25,000 worth of improvements since the lease was granted, on a 70-year lease, extending it by 90 years might add £40,000 to the value. The premium payable for the lease extension could be in the order of £23,500 – obviously the lessee would have to pay both his or her own and the freeholder’s valuation and legal costs. Sometimes it is possible to back-toback or extend and sell simultaneously, particularly with a very short lease where the extension may cost more than you can afford. Alternatively, if there is sufficient equity in the property and you meet the lender’s criteria, you may be able to increase your mortgage to pay for the extension and the professional fees. Increasingly vendors are serving the Initial Notice and assigning the benefit of the notice to the purchaser to overcome the two-year ownership rule.
Subject to how efficient you are, plus your freeholder, his solicitor, your solicitor and your surveyor, this process could take from 3-12 months – unless of course it lands up in LVT because you cannot agree values. However, there are legal time-lines in place to prevent the process being unnecessarily drawn out.
This is only intended as a simple guide. For example, no reference has been made to headleases that often occur in central London. All those considering extending their leases, should seek legal and valuation advice, specific to their properties.