Step by step guide to lease extensions

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The concept

Whilst your lease is probably the most valuable asset you own, worth whatever you could sell it for in the market place, the freeholder holds a stake in its value too. Why, because a) he receives investment income from it (the ground rent), b) has the hope value of a premium from you (for buying a lease extension) and c) holds the reversionary interest (the value of it vacant flat in X years time when your lease runs out).

Step 1 - establish if you qualify to claim a lease extension

In 1993 leaseholders were given statutory rights under Section 56 of the 1993 Act to claim a 90 year lease extension at a reduced ground rent of £1.00/peppercorn if demanded. Increasingly legislation has changed making it easier for leaseholders, for example, you now only need to own the lease for 2 years, do not need to live in the property and can own it through a company.

Step 2 - get your papers together

The lease - this is likely to be required by the valuer to calculate your future ground rent commitments and the lawyer to confirm title searches prior to serving a Section 42 Notice to claim your rights. Find your last ground rent demand to be sure who you are currently paying ground rent too. Don't worry if your Freeholder has long disappeared, there is a procedure called a "vesting order" which ensures that you can still get your lease extended.

Step 3 - get advice on a "reasonable premium"

Fees will be well spent if a valuer with appropriate expertise is selected. Speak to the person that might take on your case, ask them some difficult questions! Check the report will include the calculations to show you how the premium is made up, a commentary/explanation of the methodology and comparable market transactions/caselaw evidence on which your valuer is to rely. This level of detail will deliver you confidence to make key decisions and an understanding of which parameters affect the end figure, else how can you decide your opening negotiation position.

Step 4 - Serve a Notice or open informal discussions?

A difficult question! There is no downside to asking whether your landlord will entertain informal discussions. However, don't give up if the answer is "serve your notice" as it is the notice that secures the Freeholder's "reasonable" costs in dealing with your claim, even if you give up. If you are proceeding informally you will need to ensure that the Freeholder is quite clear that it is your Section 56 rights you are negotiating about *see step 1 above. A claim notice fixes the valuation date (at date of notice) and establishes that you are claiming your Section 56 rights.

Step 5 - Agree the "premium" to be paid for the lease extension

Our research suggests that about half of premiums are agreed informally, and of the half negotiated after service of a claim notice only about five percent end up at the Leasehold Valuation Tribunal. There are 13 valuation variables to be agreed and three components of the valuation to be established. Some variables are fact, for example the ground rent, others are based on property and financial market evidence or caselaw such as the long and short lease values and yield rates.

Step 6 - Prepare the "Supplemental Lease and Deed of Variation"

This is the legal instrument that extends your lease. The lessee's rights are to vary two terms of the lease, the ground rent and the term, the Freeholder cannot force you to agree to changes to other clauses, albeit many try, and your old lease does not get ripped up. It is sometimes here that leaseholders who went down the informal route become unstuck when the Freeholder suggests that whilst the premium is agreed, they do not agree to the ground rent being reduced to £1.00/peppercorn. If you have a mortgage it is necessary to obtaining your mortgagees consent to the lease extension as they too have an interest in your leasehold title. This is just a formality as we cannot imagine a situation where a mortgage company would refuse to approve a deed that increases the value of their security.

Step 7 - register your lease extension to increase the value of your flat

The Supplemental Lease and Deed of Variation is a document that is usually executed by deed. It needs to be registered at HM Land Registry to become part of your properties title. There is a nominal registration fee and stamp duty land tax form to be filled in.

3 top tips every leaseholder should know:

If you have a short lease, have owned the flat for two years and want to sell up, you can serve a claim notice and sell your flat with your lease extension rights so the new purchaser does not have to wait two years to qualify, during which time invariably the price of a lease extension will be rising.
Since July 2003, if your lease has more than 80 years unexpired you do not have to pay marriage value. Marriage value is the difference between the freeholder's interest prior to the lease extension and his interest after which otherwise is shared 50:50.
Your claim notice could be invalid if the price served does not pass two key tests: (a) the bonafides test, (b) the realistic test. The principle of bonafides can be established if you have sought professional valuation advice. The principle of realistic accepts that the notice might not need to reflect your best offer, as it is accepted that valuations and the eventual premium agreed are a matter for negotiation. In this test the Court's approach would be to review the variables of the valuation and for example to exclude marriage value or development potential could invalidate your initial notice.