Why you should extend your lease now

Emma Lunn explains why extending your lease should be thought about sooner rather than later...

Falling house prices are bad news for homeowners, right? Not necessarily. If you own a leasehold flat and the lease is in danger of falling below – or already less than – 80 years, then your flat being worth less is good news.

Confused? Well leasehold works like this: Owning a leasehold property means you own the right to live in a property for a set period of time rather than own the land it stands on. The land is owned by a freeholder or landlord who will charge a ground rent.

When flats are built leases tend to be for 99 or 125 years. In theory, when this time period is up, the flat is returned to the freeholder or landlord. However, in reality most leases are extended well before then.

The 1993 Leasehold Reform Act means a qualifying leaseholder has the right to be granted a new lease for an additional 90 years from the expiry of their current lease. To be eligible, you need to have owned the property for at least two years and the lease must have been for more than 21 years when granted.  

House prices are important because, in general, the less your property is worth, the cheaper it is to extend your lease.

Why you need to get a lease extension

If the unexpired term of your lease is for less than 80 years you need to get it extended for two main reasons.

Firstly, a longer lease will maintain or enhance your property’s value and make it easier to sell or remortgage. Mortgage lenders differ on their attitude to leases but you’ll find it hard to get a mortgage if there are less than 70 years left. If you’re selling your property, potential buyers will be put off by a short lease.

Secondly, the two main factors determining the cost of a lease extension are the value of the property and the length of the current lease. Once the lease drops below 80 years the cost of extending it goes up rapidly – so best to get it extended before the 80 year cut off point if you want to do it cheaply.

How to extend a lease

You can get a rough idea of how much a lease extension will cost by using the calculator on the Leasehold Advisory Service website. All you need to know is the property’s approximate value, the ground rent and the number of years left on the lease.

However, it’s best to get a surveyor who specialises in lease extensions. He or she will work out how much you should offer the freeholder and manage negotiations.

The surveyor’s work during a lease extension isn’t really looking at the structure of the building like when you buy a property, but doing a complex set of calculations. He or she will look at the current length of the lease, the property’s location, ground rent, terms in the lease, and the value of the flat with or without the lease extension.

Once the surveyor’s done his/her sums, he/she will be able to suggest how much your opening offer to the freeholder should be.

However, making an offer to the freeholder isn’t as simple as a quick phone call or letter: you need a solicitor to serve a “tenant’s notice” or section 42 notice under the 1993 Leasehold Reform Act on the freeholder.

The section 42 notice involves your opening offer. It also triggers a timetable under which the landlord has at least two months in which to respond and serve his own notice - the landlord's counter notice or section 45 notice. This will include the freeholder’s opening offer. Don’t be surprised if the landlord or freeholder’s opening offer is twice your offer – now it’s time to haggle and it’s back to your surveyor who negotiates with the landlord’s surveyor.

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How long this takes depends on the parties involved but if an agreement hasn’t been reached within two months you can make an application to the Leasehold Valuation Tribunal (LVT).

The LVT can make a ruling on what is a fair price for the lease extension but it’s an expensive process. Normally just threatening to take a case to a tribunal will make an unreasonable freeholder see sense.

Once the price of the lease extension is agreed, it’s back to each parties’ solicitors to draw up and check a new lease. Once it’s been signed by both parties your solicitor will register the new lease with the Land Registry.

How much does a lease extension cost?

As described above, how much a lease extension costs depends on several factors. The bad news is that as well as paying your solicitor and surveyor, you have to foot the bill for the freeholder’s surveyor and solicitor too.

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