Extending a residential lease of flat – the basics
Legal right to extend
- The leaseholder must have owned (but not necessarily lived in) the property for at least 2 years
- The lease must originally have had a term of at least 21 years
- Leaseholder will have to pay a premium which is calculated according to a formula to extend and to have complied with the statutory procedure
- Note that in most cases it is in neither leaseholder or freeholder’s interests to go the whole way down the statutory procedure. Most extensions are agreed by consent after some negotiation
Why do leaseholders extend leases ?
The most common reason now for extending leases is in preparation for selling a lease and when it is getting near to only having 80 years left to run, This is because below that level, it becomes more expensive to extend, some lenders for potential buyers have become more fussy about the length of leases and buyers psychologically like a long lease. Extending a lease in preparation for sale can enhance value but careful consideration of the pros and cons is always advisable
But bear in mind that if you wait until you have less than 80 years to go, buying an extension becomes more expensive (under 80 years and you have to pay so-called Marriage Value – more on this below).
How long does an extension take ?
The process can take anything from weeks to over a year. If you have a particularly intransigent or badly advised freeholder, you may have to follow the statutory procedure and this takes time. If you have a sensible freeholder who understands that there are certain quite easily parameters for the negotiations on premium and/or other matters, the process can be quick. Some freeholders seek to include other aspects in the extension negotiations, which are not strictly their rights under the statutory provisions. A classic example of this is seeking to agree an increased ground rent as part of the negotiations and for a quick resolution. To speed things up you should seek advice from experienced lease extension solicitors and potentially a surveyor at an early stage.
Freeholders can be particularly difficult and seek to extract extra concessions and even a much higher premium if they are aware that the leaseholder is urgently trying to sell and the buyer insists on a longer lease being in place. Be wary of this type of situation and see below for one type of solution.
What happens if an agreement can’t be reached with the freeholder and a buyer is being difficult ?
One problem can be the statutory requirement for 2 years ownership before extending the lease. If the freeholder is already known to be difficult, a common option is for a seller who has owned for 2 years to start the formal statutory process and then to assign (transfer) the benefit of the already started procedure to a buyer. This will sidestep the 2 year ownership problem.
How to start the lease extension process ?
Firstly, we would suggest getting a good conveyancing solicitor on board (there are many solicitors in London, where lease extensions are particularly common, who can help) and a surveyor possibly for valuation purposes. There are then some statutory forms that need to be completed. It is very important to be careful about making any early offers to the freeholder as a parallel process to the statutory procedure and all communications should be expressly “without prejudice”
Any guidelines for what it may cost in terms of premium to extend ?
In legal terms, the value is based on 3 elements. The first two are to compensate the landlord for loss of ground rent during the rest of the existing term of the lease, and for not receiving possession of the property at the end of the term. As stated above, it is important, when possible to extend before the lease has less than 80 years to run, because then the freeholder becomes entitled to marriage value, a complicated and technical calculation of an extra, possibly significant amount more. Typically, in London, with a lease of perhaps 85 years left, valued at about £250k, the amount to extend could be around 7.5k purely as a guideline figure. Be aware also that, under the statutory procedure to extend a lease, the starting point is that the leaseholder is liable for both parties’ legal and valuation costs, and this can easily end up adding an extra 3k plus vat of additional costs if the matter goes some way down the statutory path.