How Much Does It Cost To Extend A Leasehold?

Nikka Sulton

How Much Does It Cost To Extend A Leasehold?

A lease extension serves as a contractual arrangement between a property’s freeholder and the leaseholder, permitting the latter to extend their tenure within the premises for a renewed period. Such extensions are pivotal in bolstering the property’s intrinsic value and facilitating its sale in the real estate market. However, while the benefits of extending a lease are evident, navigating through the process entails considerable time and financial investment.

The costs associated with lease extensions exhibit significant variability, contingent upon a multitude of factors. These factors include the assessed value of the property, the duration remaining on the existing lease term, the prevailing ground rent obligations, and the cooperative stance of the freeholder in negotiations. Furthermore, stakeholders often contemplate the projected worth of the property subsequent to the lease extension, thereby factoring in prospective gains or losses stemming from the endeavor.

What is a Lease Extension?

Owning a leasehold property represents a unique tenure arrangement where the homeowner possesses the right to reside in a property for a fixed period, typically spanning decades, without actually owning the land upon which the property is situated. Instead, the land remains the property of a freeholder or landlord, who may levy ground rent charges on the leaseholder. This leasehold structure is frequently encountered in the context of flats, where lease durations often extend to 99 or 125 years. While the legal framework suggests that the property reverts to the freeholder or landlord at the conclusion of the lease term, practical considerations often lead leaseholders to pursue lease extensions well before this eventuality arises.

Extending a lease involves a multifaceted process, typically entailing negotiation with the freeholder or landlord. Central to this process is the payment of a premium to the freeholder, representing compensation for the extension of the lease duration. This premium is justified on several grounds: firstly, it acknowledges the prolonged duration during which the freeholder relinquishes possession of the property, thus entailing a financial sacrifice on their part. Moreover, the grant of a lease extension effectively extinguishes future ground rent obligations, thereby providing the freeholder with a lump-sum compensation for the forfeiture of this ongoing revenue stream.

When Should You Extend your Lease?

Extending your lease before it drops below 80 years is advisable for several reasons. Firstly, the cost of extending a lease tends to increase annually, but this rise becomes more pronounced as the lease term diminishes to 80 years or fewer. Additionally, obtaining financing or refinancing can become progressively difficult as the lease approaches the 70-year mark. Shorter lease terms often deter potential property buyers, underscoring the importance of extending your lease before putting your property on the market.

When considering lease extension, timing is crucial. Extending your lease before listing your property for sale can enhance its marketability. Prospective buyers are typically discouraged by properties with shorter lease terms, preferring those with longer leases. Moreover, part of the calculation for the lease extension premium hinges on the property’s value. Generally, higher property values result in higher lease extension costs. Therefore, extending your lease during periods of declining property prices may offer cost-saving opportunities, if feasible.

In summary, extending your lease before it falls below 80 years is a strategic move to mitigate escalating costs and maintain your property’s appeal to potential buyers. By addressing lease extension proactively, you can navigate the complexities of property ownership more effectively and secure favorable terms that align with your long-term goals and financial objectives.

How Much Does it Cost to Extend a Lease?

If a flat has 80 years left on the lease and is anticipated to be valued at £400,000 post-extension, with an annual ground rent of £100, the lease extension could range from approximately £7,000 to £10,000, excluding additional expenses outlined below.

The expenses associated with lease extensions vary significantly, but the following table provides estimates of the typical costs involved:

The lease extension premium

When extending a lease, the premium negotiated with the freeholder typically constitutes the largest expense, often exceeding £5,000.

Several factors influence the premium, including:

Location of the Property: Properties situated in different areas may command varying premiums due to factors like demand, market trends, and property values.
Value of the Property: The overall worth of the property plays a significant role in determining the lease extension premium. Higher-valued properties may incur proportionately higher premiums.
Lease Length: The remaining length of the lease at the time of extension impacts the premium. Generally, shorter lease terms necessitate higher premiums.
Ground Rent Payable: The annual ground rent stipulated in the lease agreement can affect the premium amount. Higher ground rents may lead to increased premiums.

Negotiation with the Freeholder: The outcome of negotiations with the freeholder can significantly influence the final premium amount. Factors such as the freeholder’s stance, willingness to negotiate, and market conditions can affect the negotiation process and ultimately the premium.

Surveyor’s Fees

To determine your initial offer to the freeholder, hiring a specialist surveyor is essential. They will conduct a thorough valuation of the property, considering various factors. The cost of this valuation typically ranges from £600 to £900, depending on the property’s size and value. Once the freeholder responds with a counteroffer, your surveyor will engage in negotiations until a premium is mutually agreed upon.

Solicitor’s Fees

Solicitor fees for lease extension proceedings usually fall within the range of £600 to £1,200. In addition to these fees, there are conveyancing costs to consider. Your solicitor will oversee the necessary legal processes, which include serving the Section 42 notice on the freeholder and managing their response. This aspect of the procedure ensures that all legal requirements are met and that communication with the freeholder is conducted in a formal and legally compliant manner.

As part of the process, your solicitor will handle various tasks related to the lease extension. This includes serving the Section 42 notice on the freeholder, which formally notifies them of your intention to extend the lease. They will also be responsible for managing the freeholder’s response, particularly if they serve a Section 45 notice in reply. Throughout these interactions, your solicitor will advocate on your behalf to negotiate favorable terms and ensure that your rights as a leaseholder are protected.

Additionally, your solicitor will play a crucial role in finalizing the lease extension. This involves reviewing the new lease document to verify its accuracy and compliance with legal requirements. Once the new lease is confirmed, your solicitor will facilitate its registration with the Land Registry, ensuring that the extension is officially recorded and recognized. This step is essential for establishing your legal rights as the leaseholder and providing clarity regarding the terms of the extended lease.

Freeholder Costs

The Leasehold Reform Act stipulates that during a lease extension, the leaseholder must cover the freeholder’s “reasonable costs.” While ideally, these costs should align with the leaseholder’s, in practice, the freeholder’s expenses tend to be higher. This discrepancy arises because the freeholder, aware that the leaseholder bears the financial burden, may not prioritize cost-efficient choices when selecting surveyors or solicitors.

For a deeper insight into the expenses associated with purchasing freehold, delve into our comprehensive guide.

How to Keep Your Lease Extension Costs Down

Consider these key strategies to minimize the expenses associated with extending your lease:

Initiate the process before your lease dwindles below the 80-year mark. Once it reaches this threshold, you’ll incur additional costs known as “marriage value,” escalating the expense of the extension progressively.

Engage both a specialist surveyor and solicitor proficient in lease extension matters. Cutting corners on professional services may result in overpaying for the extension.
Avoid informal lease extensions proposed by the freeholder. Opting for such extensions, which deviate from the regulations outlined in the Leasehold Reform Act, may not guarantee a 90-year extension or eliminate ground rent. Some freeholders exploit informal extensions to raise ground rent, potentially complicating future property sales.

Why Should You Extend a Lease?

Extending your lease becomes imperative when the remaining term falls below 80 years for two primary reasons. Firstly, a lengthier lease preserves or enhances your property’s value, facilitating smoother sales or remortgaging processes. Securing a mortgage becomes challenging when the lease dips below the 70-year mark, affecting both you and potential buyers.

Additionally, a short lease deters prospective buyers when you decide to sell your property. The cost of a lease extension primarily hinges on the property’s value and the remaining lease term. As the lease duration decreases below 80 years, the extension expenses escalate rapidly. Hence, opting for an extension before reaching the 80-year threshold proves to be a more cost-effective approach.

How Do You Extend Your Lease?

The 1993 Leasehold Reform Act outlines the statutory procedure for lease extension, granting eligible leaseholders the right to obtain a new lease for an additional 90 years beyond the expiration of their current one. When 80 years remain on the lease, a new lease of 170 years (90 plus 80) can replace the existing one.

To qualify, you must have owned the property for a minimum of two years, and the initial lease term should have been over 21 years. Extending a lease under the Leasehold Reform Act eliminates the obligation to pay ground rent on the property moving forward.

5 steps to extending a lease

The initial step in extending a lease involves hiring a specialist surveyor to conduct a thorough valuation. This process entails intricate calculations, where the surveyor assesses various factors such as the current lease duration, property location, ground rent, lease terms, and the property’s value with and without the lease extension.
Following the valuation, the surveyor proposes an initial offer to the freeholder. This figure serves as the basis for serving a section 42 ‘Tenant’s Notice’ on the freeholder, initiating the formal process of lease extension negotiations.
Upon receipt of the section 42 notice, the freeholder has a minimum of two months to respond and serve their own notice, known as the landlord’s counter notice or section 45 notice. This notice typically includes the freeholder’s initial offer, which may differ significantly from the tenant’s opening offer. Negotiations between surveyors representing both parties aim to reach a mutually acceptable price.
In the event that an agreement cannot be reached within the specified timeframe, the tenant has the option to apply to the Leasehold Valuation Tribunal (LVT). The LVT adjudicates on what constitutes a fair price for the lease extension, although this process can be costly.
Once a price is agreed upon, the next step involves engaging a solicitor to handle the necessary legal documentation and draft a new lease. Upon finalizing the lease agreement and obtaining signatures from both parties, the conveyancing solicitor proceeds to register the new lease with the Land Registry, completing the lease extension process.

How Long Does The Process Take?

Extending your lease typically spans a timeframe of 3 to 12 months, following the process outlined in the Leasehold Reform Act, which operates within statutory deadlines. Upon serving the section 42 notice, the freeholder must respond with a section 45 notice within two months. Subsequent negotiations can extend up to six months, contingent upon reaching a mutually acceptable price.

The pace of proceedings hinges on the efficiency of negotiations in agreeing upon a price. Once consensus is reached, finalizing the lease may require one to three months, followed by additional time for registering the new lease with the Land Registry, typically spanning a few more months.