Understanding Residential Lease Extensions in the UK
Youssef Hammouda
Under the Law of Property Act 1925, property ownership can be divided into two main categories: freehold and leasehold properties. Freehold is the closest thing to absolute ownership as it gives the holder the right to occupy an estate for indefinite duration. On the other hand, leasehold means you own the property for a set period, with the land belonging to the freeholder. In the latter, when a lease begins to run out, extending it becomes crucial to maintain the property’s value and avoid complications in selling or remortgaging. In this blog, we provide a comprehensive overview of residential lease extensions in the UK.
What is a Lease Extension?
A lease extension refers to the process of extending/adding more years to your current lease term. Typically, UK residential leases are granted long periods, often 99, 125, or 999 years. However, as the lease term decreases, particularly below 80 years, the property can become harder to sell, and mortgage lenders may be less willing to finance it. Extending the lease helps safeguard the property’s value and provides peace of mind for the leaseholder.
Why Should You Consider Extending Your Lease?
1. Preserve Property Value:
The shorter the term of the lease, the less your property is worth. Properties with leases below 80 years are particularly affected, as potential buyers may be deterred by the cost and hassle of extending the lease themselves.
2. Facilitate Sale or Remortgaging:
Mortgage lenders often have strict criteria regarding lease length. A short lease can make it difficult to sell your property or secure a mortgage, limiting your financial options.
3. Protect Against Ground Rent Increases:
Some leases include escalating ground rent clauses. Extending your lease can provide an opportunity to renegotiate these terms or convert your lease to a “peppercorn rent” (£0).
Who can extend the lease?
Previously under the Leasehold Reform, Housing and Urban Development Act 1993, to qualify for a statutory lease extension, you must have owned the property for at least two years. You can extend the lease by 90 years if your lease is a flat, or by 50 years if it’s a house.
On the other hand, the voluntary route is another way in which you can get your lease extended. As the name suggests, there is no statutory obligation on the landlord to grant extension. Therefore, the terms of the new lease are subject to negotiation between you and the landlord.
What is the process of lease extensions?
The first step is to get a valuation from a qualified surveyor. They will assess the premium (price) you need to pay the freeholder to extend your lease. The premium is calculated based on several factors, including the current lease length, the property’s market value, and ground rent.
The next step is to Serve a Section 42 Notice. Under Section 42 of the Leasehold Reform, Housing and Urban Development Act 1993 a notice must be given by the leaseholder to the landlord. This notice is a formal request to extend your lease and includes your proposed premium. The freeholder then has not less than two months to respond with a counter-offer under Section 45.
The freeholder will typically respond with their own valuation, which may differ from the one submitted in the original notice. This initiates a negotiation period, during which both parties aim to agree on the premium.
Once both parties agree on the terms, the lease extension is formalised through a deed of variation, and the new lease is registered with the HM Land Registry.
What are the costs of extending a Lease?
The cost of extending a lease depends on the following:
- The value of the property (including any improvements made to the flat)
- How many years left on the Lease
- Surveyor’s Fees
- Legal Fees
- Stamp Duty Land Tax (SDLT)
As mentioned, leaseholders can negotiate a lease extension voluntarily with the freeholder, outside the statutory process. While this may offer more flexibility in terms and costs, it can also be risky, as the freeholder is not legally obliged to offer a fair deal.
Recent Reforms and Changes
The UK government has recognised the need for leasehold reform and has proposed changes that could make the lease extension process easier and more economical for leaseholders. In May 2024, the Leasehold and Freehold Reform Act 2024 (LFRA) received Royal Assent, aiming to improve the leaseholders’ rights by:
- extending leases by 990 years for house and flats (up from 50 years in houses and 90 years in flats).
- Removing the rule that leaseholders must own their house or flat for two years before they can extend their lease or buy the freehold.
- Capping ground rents within the lease extension valuation, in order to reduce the premium payable.
- Giving more rights to leaseholders regarding service charges, insurance commissions, administration charges, and sales information, and reducing the costs they pay in legal disputes.
Conclusion:
Lease extension is an essential consideration for any leaseholder looking to protect their investment and maintain flexibility in managing their property. Whether you opt for the statutory process or negotiate directly with your freeholder, understanding the key steps and costs involved will help you make informed decisions. As reforms continue to reshape the leasehold landscape in the UK, staying informed will be crucial to navigating these changes effectively.
For specialist advice and support. please get in touch with our divorce solicitors in London now by calling 020 7139 9266 or contacting the GOOD LAW INTERNATIONAL office.
A warm welcome to GOOD LAW INTERNATIONAL. To learn more about us and our practice areas, we invite you to browse through our website and contact us or book an appointment.
