The Legal Framework

All flats and apartments in England and Wales are leasehold, usually on leases that were initially for 99 years or longer. Unlike freehold properties, where the owner has outright ownership of both the building and the land it stands on, leasehold ownership is essentially a long-term tenancy.

Leaseholders own the property for a set period, as stipulated in the lease agreement, after which ownership will eventually revert to the freeholder. As the lease term diminishes, it becomes crucial for leaseholders to consider lease extensions.

The lease extension process in England and Wales is governed by several pieces of legislation, the most notable being the Leasehold Reform, Housing and Urban Development Act 1993. This Act provides leaseholders of residential flats and apartments with the statutory right to extend their leases. There is separate legislation that covers extending the leases for houses. The Act stipulates that leaseholders who have owned their property for at least two years are entitled to extend their lease by 90 years in addition to the remaining term, at a 'peppercorn rent' (effectively zero ground rent).

How to Extend a Lease

The process of extending a lease can be intricate and typically involves the following steps:

1. Eligibility Check: Flat owners must ensure that they meet the eligibility criteria. This is primarily having owned the leasehold for at least two years.

2. Valuation: Obtain a professional valuation to determine the premium (the cost of extending the lease). This is a crucial step as it involves calculating the value of the extended lease and the compensation due to the freeholder. This is where Ringley Surveyors can help. Please contact nichola.pughe@ringley.co.uk or call 020 7267 2900 to see how we can help.

3. Serve a Notice: The leaseholder must serve a Section 42 Notice on the freeholder, outlining their intention to extend the lease and proposing a premium. Once again Nichola, working alongside Ringley Law, can help with this.

4. Freeholder’s Response: The freeholder is compelled to respond with a Section 45 Notice within two months. They must either accept the offer or issue a counteroffer.

5. Negotiation: Both parties will then negotiate the terms. If an agreement cannot be reached, the matter may be referred to the First-tier planetrent.co.uk/blog/could-a-tax-tribunal-ruling-mean-btl-investors-avoid-3-stamp-duty-surcharge'>Tribunal (Property Chamber). This can be laborious and cause delays so it is better to start this whole process well in advance of selling your property.

6. Completion: Once terms are agreed upon, a formal lease extension agreement is drafted and signed, often involving solicitors and potentially a mortgage lender if the property is mortgaged. This is actually a new lease rather than the variation of the existing one.

The Costs Involved for a Lease Extensions

The cost of extending a lease can vary significantly and includes several components:

- Premium: The main cost, calculated based on the current lease length, property value and ground rent. Typically, the shorter the remaining lease term, the higher the premium. Marriage value comes into play if there is less than 80 years remaining. This is the increase in value of the property following the completion of the lease extension. It is the “profit” that results from marrying the freeholder’s and leaseholder’s interests.

- Valuation Fees: Fees paid to a surveyor for conducting the valuation.

- Legal Fees: Both the leaseholder and the freeholder will incur legal costs. The leaseholder often bears the cost of both parties' legal fees.

- planetrent.co.uk/blog/could-a-tax-tribunal-ruling-mean-btl-investors-avoid-3-stamp-duty-surcharge'>Tribunal Fees: If negotiations fail and the case goes to planetrent.co.uk/blog/could-a-tax-tribunal-ruling-mean-btl-investors-avoid-3-stamp-duty-surcharge'>tribunal, additional costs will be incurred.

The Implications for Property Value

Extending a lease will have a significant impact on a property’s value. Properties with short leases (generally less than 80 years) can be difficult to sell or to mortgage and will often command lower market prices. Extending the lease not only enhances the property’s marketability, but also increases its value. A lease extension typically adds value by:

- Increasing Marketability: Properties with longer leases are more attractive to buyers, making them easier to sell.

- Mortgageability: Many lenders are reluctant to provide mortgages for properties with short leases. Extending the lease can make it easier to secure financing.

- Enhancing Value: The added lease term directly correlates with an increase in property value, and will exceed the cost of the lease extension itself.

Considerations and Challenges plus Recent Developments and Reforms

Lease extensions, while beneficial, can pose several challenges. The process can be time-consuming and complex, often requiring professional assistance. Additionally, the cost can be substantial, particularly if the lease has less than 80 years remaining, due to the marriage value.

Moreover, negotiating with the freeholder can be challenging. Freeholders might demand high premiums or be unresponsive, complicating the process. In such cases it is crucial for leaseholders to seek expert advice and be prepared for potential disputes that might need resolution through legal channels.

The Government has recognised the complexities and financial burdens associated with lease extensions and is considering reforms to make the process more straightforward and affordable. Proposals include abolishing the marriage value, reducing the cost of lease extensions and introducing a simpler calculation method for the premium. These reforms aim to balance the interests of leaseholders and freeholders while promoting fairness and transparency in the leasehold system. It is not known when these reforms will take place, and matters will be further complicated by a General Election.

To Conclude - How can Ringley Help?

Lease extensions in the UK are a critical aspect of property ownership for leaseholders. Understanding the legal framework, costs and implications for property value is essential when making informed decisions.

Whilst the process can be complex and costly, the benefits of extending a lease make it a worthwhile consideration. Ongoing reforms may further streamline the process, making it more accessible and fair for leaseholders in the future. The risk is that the premium required increases over time and waiting for this legislation, should it ever come, could prove to be costly. It is a difficult decision to make!

We have been extremely busy over the past few months negotiating lease extensions, including the service of the appropriate Notices, and we would be delighted to help with yours. Please contact Nichola Pughe on 020 7267 2900 or email her nichola.pughe@ringley.co.uk.