May 31, 2024 3:47 pm

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Nikka Sulton

Leasehold properties are governed by intricate legal agreements known as leases, delineating the rights and obligations of both landlords and tenants. Unlike freehold ownership, leases confer limited occupancy rights for a specified term, typically in exchange for rent or a lump-sum payment. Understanding the nuances of leases, including lease extension, is crucial for navigating property ownership effectively. This comprehensive guide explores the fundamentals of leases, the lease extension process, and essential considerations for leaseholders. Whether you’re a prospective buyer, current owner, or landlord, this resource equips you with the knowledge to make informed decisions and protect your interests in the leasehold property market.


What is a lease?

A lease is a legal agreement between a Lessor (Landlord) and a Lessee (Tenant), establishing a property interest for a specified duration. Unlike freehold ownership, which grants indefinite rights, a lease confers occupancy rights for a defined term, typically in exchange for rent payments or a lump-sum premium. Within the lease document, your rights and obligations as the leaseholder, as well as those of the landlord, are clearly outlined. This includes details regarding property usage, maintenance responsibilities, and any restrictions or conditions imposed.

As the leaseholder, you are entitled to occupy and utilize the property for the duration specified in the lease, known as the ‘term.’ This term could range from a few years to several decades, depending on the terms negotiated between the parties. However, it’s essential to understand that the ownership of the property ultimately remains with the Landlord, even though you have exclusive possession during the lease term. This concept is referred to as the ‘reversion,’ wherein ownership reverts to the Landlord upon the expiry of the lease.

Throughout the lease term, you have certain rights as the tenant, including the right to peaceful enjoyment of the property, the right to privacy, and the right to have the property maintained in a habitable condition by the landlord. Conversely, you also have obligations, such as paying rent promptly, adhering to any restrictions outlined in the lease, and maintaining the property in good condition, subject to reasonable wear and tear.

Upon lease expiration, various scenarios may unfold depending on the terms stipulated in the lease agreement and applicable legal regulations. In some cases, leaseholders may have the option to renew the lease for an additional term, negotiate new lease terms with the landlord, or vacate the property altogether. However, if no renewal or negotiation occurs, ownership of the property reverts to the landlord, and the leaseholder must vacate the premises.

In summary, a lease is a legally binding contract that governs the relationship between a landlord and tenant, outlining rights, responsibilities, and terms of occupancy. Understanding the implications of a lease agreement is crucial for both parties to ensure a mutually beneficial and harmonious tenancy arrangement.


What is a lease extension?

Extending a lease entails the crucial process of lengthening the duration of your leasehold tenure, thereby postponing the eventual return of the property to the landlord’s ownership. This significant undertaking offers leaseholders the opportunity to maintain their residency and continue enjoying the benefits of property ownership for an extended period. Whether you choose to negotiate directly with the landlord or opt for the formal route of serving a Section 42 Notice, navigating the complexities of lease extension demands careful consideration and often necessitates professional legal guidance to ensure optimal outcomes.

Direct negotiations with the landlord represent one avenue for pursuing a lease extension, providing an opportunity for leaseholders to engage in constructive dialogue and reach mutually agreeable terms. However, this approach requires adept negotiation skills and a thorough understanding of leasehold laws and regulations to navigate potential challenges effectively. Alternatively, leaseholders may opt to initiate the process by serving a Section 42 Notice, a formal legal document that triggers the statutory right to extend the lease. While this route offers a structured framework for lease extension, it typically involves intricate legal procedures and complexities, highlighting the importance of seeking expert legal counsel to oversee the process and safeguard one’s interests.


Why extend a lease?

Extending a lease with less than 80 years remaining can significantly enhance your property’s value and alleviate various challenges associated with short leases. A property’s marketability often diminishes when its lease term is short, as mortgage lenders are hesitant to lend against it, limiting potential buyers to cash buyers only. This restriction narrows the pool of interested buyers, potentially prolonging the selling process and reducing the property’s overall desirability in the market.

Additionally, properties with short leases face obstacles when it comes to remortgaging. Mortgage lenders are typically wary of financing properties with leases below a certain threshold, making it difficult for homeowners to secure favorable remortgage deals. This limitation can impede homeowners’ ability to access competitive mortgage rates and favorable terms, ultimately impacting their financial flexibility and stability.

As the lease length decreases, the cost of extending the lease tends to rise, further compounding the financial implications for homeowners. Leaseholders must be prepared for potentially substantial expenses associated with lease extension, especially as the lease term approaches the critical 80-year mark. This increase in extension costs is compounded by the concept of marriage value, which applies to leases below 80 years.

Leases with less than 80 years remaining attract marriage value, entitling the freeholder to 50% of the value added by the lease extension. This additional cost factor underscores the importance of strategic planning and proactive management of leasehold properties, as leaseholders must carefully weigh the financial implications and consider their long-term housing and investment goals when deciding whether to extend their leases.


Who can extend a lease?

Any eligible leaseholder can request a lease extension, known as a ‘qualified leaseholder’. To qualify, you must have owned the property for a minimum of two years, and the original lease must have been granted for a term exceeding 21 years. Meeting these conditions allows you to compel the landlord to extend the lease under favorable terms.


Rights granted under the Leasehold Reform Housing and Urban Development Act 1993

Under the Leasehold Reform Housing & Urban Development Act 1993, eligible leaseholders have the right to extend their lease by an additional 90 years, along with a peppercorn rent for the entire term. For instance, if there are 75 years left on the lease, a new lease of 165 years (90 plus 75) can be granted, with no rent payable throughout.

However, the landlord is entitled to a premium, a lump sum payment, for granting the lease extension. The premium’s size is negotiable but follows a formula outlined in the legislation. Qualified leaseholders must meet certain criteria, including owning the property for at least two years and the original lease term being over 21 years, to exercise their right to a lease extension.


What other rights do you have?

As a leaseholder, you have several rights, including:

  • Knowing the name and address of the freeholder.
  • Accessing information about insurance costs.
  • Understanding how service charges are calculated and spent, with receipts available upon request.
  • Participating in a Section 20 consultation if you need to pay over £250 for planned work or £100 per year for work lasting more than 12 months. You can challenge any charges you deem unreasonable or dispute work that doesn’t meet acceptable standards by seeking recourse through a tribunal.
  • Collaborating with other tenants to collectively purchase the freehold of your block, regardless of the landlord’s intentions to sell.


Should I extend my lease before selling?

Deciding whether to extend your lease before selling depends largely on its remaining duration and your urgency to sell.

Consider these guidelines:

  • More than 90 years remaining: Not necessary to extend.
  • Between 90 and 85 years: Advisable to extend as it enhances the property’s appeal to buyers.
  • Between 85 and 80 years: Recommended to initiate the extension process or at least explore options. It’s crucial because after selling, the new owner must wait two years before applying for an extension. During this time, the lease could dip below 80 years, significantly increasing extension costs and potentially impacting the property’s resale value.



When the lease dips below 80 years, the pool of lenders willing to provide mortgages decreases significantly.

At this point, only a few lenders might consider lending, but with less favorable terms such as lower loan-to-value ratios and higher interest rates.

If the lease falls below 60 years, securing any type of mortgage could become exceedingly difficult, if not impossible.


Saleability is effected

Selling your property becomes challenging if potential buyers cannot obtain a mortgage for it.

Limited to cash buyers, the pool of interested parties decreases, typically focused on seeking bargains.


Should I extend my lease or buy share of freehold?

Under the 1993 Leasehold Reform Act, eligible leaseholders can extend their lease or collectively purchase the freehold, known as ‘collective enfranchisement’.

If dissatisfied with the freeholder’s management or high charges, obtaining the freehold grants control over these matters.

However, this requires cooperation among neighbours and meeting eligibility criteria:

  • At least half of all flat owners must be leaseholders interested in buying the freehold.
  • In a block of two flats, both parties must seek to purchase the freehold.
  • Two-thirds of leaseholders must hold long leases (originally granted for over 21 years).

This decision requires careful consideration as it involves running a freehold company and serving as directors.


When is it not worth extending your lease?

If your lease has over 90 years remaining, extending it might not be urgent unless significant savings on ground rent are possible or you plan long-term residency.

Considerations vary; if you’re elderly and not relocating soon, you might leave the lease issue to heirs, but ensure they grasp the implications.

If collective enfranchisement plans are in motion, hold off on individual lease extension; waiting could render the process cheaper and smoother.

Furthermore, if leaseholders collectively seek freehold purchase while your extension is pending, your application might be halted.


How much does it cost to extend a lease?

The cost of extending your lease comprises two main components:

  1. The premium (starting from £5k)
  2. Professional fees, expenses, and taxes (typically £2k-£3k, but potentially higher)


Determining the premium:

The premium’s exact amount is subject to negotiation between you and the landlord. It hinges on factors like comparable property values and potential marriage value. While online calculators like the one provided by LEASE offer quick estimates, they may not be precise. It’s crucial to engage a leasehold valuation professional. A competent surveyor will provide a range of estimates, considering both leaseholder and landlord perspectives, and draw on local insights to anticipate negotiation points.


Pro tip:

When selecting a surveyor, prioritize expertise and negotiation skills. They’ll represent you in negotiating the premium with the landlord’s solicitors. Take the time to find a reputable professional to ensure fair negotiations and accurate estimates.

The lease extension formula, outlined in the Leasehold Reform Act 1993, serves as the framework for determining the capital amount, known as the ‘premium’, that a leaseholder must pay to the freeholder when extending a lease. It takes into account various factors, including potential current and future losses to the landlord, along with compensation for granting the new lease and the landlord’s portion of the marriage value.

Marriage value, a key concept in lease extensions, arises when extending a lease results in an increase in the property’s value, particularly if the lease duration is less than 80 years. For instance, a property valued at £120,000 with a short 45-year lease could potentially be valued at £175,000 with a lease extended beyond 90 years. The difference in value, in this case, £55,000, represents the marriage value, with the freeholder entitled to 50% of this increase. This underscores why it’s often recommended to extend a lease before it falls below the critical threshold of 80 years.


Step-by-step guide to the lease extension process

Ensure eligibility as a leaseholder by confirming that your original lease exceeded 21 years and that you’ve owned the property for at least two years.

  1. Prepare financially for the process, which typically incurs costs ranging from several thousand pounds.
  2. Identify the freehold owner; if unavailable, consider applying for a vesting order.
  3. Engage a valuation surveyor, preferably RICS and ALEP accredited, with expertise in leasehold and local property markets.
  4. Hire a solicitor experienced in lease extension, also affiliated with ALEP.
  5. Decide whether to negotiate directly with the freeholder or engage your surveyor or solicitor for discussions.
  6. Submit an informal offer if negotiations proceed smoothly; otherwise, serve a Section 42 Notice through your solicitor.
  7. Upon acceptance of the informal offer, proceed to formalize it by making a formal offer.
  8. Anticipate a possible requirement from the freeholder for a deposit within 14 days, typically 10% of the lease cost or £250, whichever is higher.
  9. Receive a counter notice (Section 45) from the freeholder, accepting your offer, proposing alternatives, or rejecting your request.
  10. Seek assistance from the Leasehold Advisory Service if negotiations stall or fail.
  11. Consider resorting to the First Tier Tribunal or Leasehold Valuation Tribunal if necessary, though this may involve lengthy and costly proceedings.
  12. Obtain approval from your mortgage lender if applicable before finalizing the lease extension through your solicitor.


Common lease extension questions


Understanding the Lease Extension Formula

Mortgage lenders have varying criteria regarding lease length for mortgage approval. Some require leases of 85+ years or a specific minimum length at the mortgage term’s end.


Considerations Before Building an Extension on Leasehold Property

Check the lease for extension entitlement, then obtain permission from the freeholder, often requiring presentation of improvement plans.


Lease Extension on Shared Ownership Property

Shared ownership properties may have different lease extension rights; consult the freeholder or refer to their policy. Full ownership grants eligibility under the 1993 Leasehold Reform Act.


Costs Involved in Extending a Lease on a Flat

Lease extension costs comprise legal fees, freeholder’s fees, premium, and potential additional taxes. Fees vary based on property value, remaining lease length, and negotiation complexity.


Understanding Section 42 Notice

A Section 42 Notice, also known as Tenants’ Notice, formally requests lease extension from the freeholder, stipulating the premium. Accurate service is crucial to avoid rejection.


Ground Rent and Its Implications

Ground rent, distinct from service charges, compensates the freeholder for land use. It varies but can be negotiated or eliminated through lease extension.


Leasehold Enfranchisement Explained

Under the 1993 Leasehold Reform Act, leaseholders can collectively purchase the freehold, termed ‘collective enfranchisement.’ Criteria include tenant agreement, lease length, and building usage.




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