All you need to know about when extending a lease
A lease, as you know, is a long-term rental agreement. It’s issued by a competent landlord or freeholder for a fixed term which is usually anywhere between 99 and 999 years. Once the lease term runs out, the leaseholder no longer has the right to use the property in any way.
Subsequently, the lease’s ownership reverts to the freeholder. In many cases, property owners consider selling their properties that have a short lease and one of the best ways to achieve this is by going through the lease extension. This detailed lease extension guide contains crucial information that you’re going to need in order to understand the steps required in the lease extensions, as well as the cost to extend the lease and a common question people, have regarding the process: “How long does it take to extend a lease?”
Why would anyone want to extend their lease?
A good length on a lease – typically 100 years or more – can actually add thousands of pounds to your flat’s or house’s market value. However, bear in mind that any lease which hovers around the 80’ish-year territory can make it very difficult to sell or even remortgage the property if it’s already under your ownership. Furthermore, lenders may be quite reluctant to grant you a mortgage on it.
This is precisely why you’d want to extend your lease beyond 90 years as it’s considered a relatively ‘safe bet’. The short lease will slow the house sale down. Even though you might hear most people tell you how it can be expensive and, at times, complicated to go through the lease extensions, the UK Government is currently overhauling the lease extensions. In fact, they have plans to make a lease extension both easier and cheaper, as many property owners feel discouraged when they come to learn the cost to extend a lease. There’s a section we’ve dedicated to “how much does it cost to extend a lease” later on in the article, to help you better understand those costs.
How do I know when to extend my lease?
From the 4M flats that currently exist in England and Wales, nearly all are leasehold because, well, it’s a common and generally easy way of owning a flat. When you own a leasehold, you have the right to live in a property for a fixed term – this can be years, decades or even centuries (in theory).
Any leasehold property which has a decent length – e.g. 100 years or above – can potentially add thousands of pounds to the property’s market value. With that said, the shorter the lease – i.e. around or under 90 years, e.g. – the lower your asking price will be. But if a lease is considered too short (around 80 years or less), you can lose thousands of pounds on the property’s market value.
This is why – as we mentioned earlier – a lease hovering around 80 years or under is considered “dangerous territory”; it can make a property extremely difficult to sell or remortgage, not to mention how unwilling lenders will be to grant you a mortgage on it. This is the primary reason why you should not buy a flat where the lease is close to or dropping below 80 years.
Who is entitled to the lease extension process?
In order to be legally entitled to the lease extension, you must be a registered owner of the said property with the Land Registry for at least two years. Once you’ve completed the purchase of the property, the registration date may be given anywhere between a few days to a few months. However, if you decide to add a friend or partner to the title deeds at some point, this two-year timeline resets. Just a quick FYI!
With that said, you cannot extend your lease if the original property was brought via shared ownership and your share of the property has not been increased to 100% – referred to as staircasing.
How long can the lease be extended?
According to the Leasehold Reform Act of 1993, nearly all flat owners can legally add 90 years to their lease at a reasonable or ‘fair’ market price. And, as we mentioned above, you must be the registered property owner for at least two years in order to qualify.
In addition, keep in mind that lease extension will offer the benefit of reducing ground rent to zero – if you have any, that is. There’s also no limit to the number of times you can extend the lease on your flat.
A different law applies to freehold houses – you can legally extend the lease by 50 years, and not by up to 90 years or more, which is the case with flats. However, the freeholder can always allow more than 50 years at their discretion.
The law for extending the lease on houses tends to get a little tricky when compared to flats, so it is especially a good idea to speak to a solicitor who has experience in this particular area. In most cases, houses are sold according to the freehold premise, but controversially, new-builds have been sold as leaseholds as of late.
Given the somewhat restrictive and trickier laws revolving around leasehold houses, it may be a more viable option to go with a freehold purchase rather than a lease extension.
How much does it cost to extend a lease?
This is undeniably the most common question people ask about the lease extension process, second to “how long does it take to extend a lease”, of course, which we’ll get to shortly.
When we talk about “how much does it cost to extend a lease”, we need to take a few variables into account such as how well the negotiations go, the lease’s length, ground rent and the underlying value. The final costs can vary a lot, however, because leasehold law can get quite complicated at times. getting legal advice from your solicitor and discussing your options is the best way to understand the individual costs which apply to you. So, apart from the cost of leasehold extension, you need to keep the other fees in mind:
Valuation, negotiation and a legal fee of leasehold extension
A valuer must be hired to estimate the lease extension’s price and carry out negotiations with the freeholder on your behalf. In addition, a lawyer for any legal advice must be paid to first review the updated lease and then get it registered with the Land Registry.
Freeholder’s valuation and legal fee
The freeholder’s valuation fee and reasonable costs must be paid – which aren’t all that “reasonable” in most cases, to say the least! However, your solicitor should be able to ensure that you’re not paying too much.
The combined cost of these ‘other fees’ can be anywhere between £4,000 and £5,000. However, this does not account for the freeholder’s costs – those pertaining to negotiating the price on your behalf or for dealing with the Court, in case the matter has to be taken that far.
Even though stamp duty applies to lease extensions, in many cases, you don’t have to pay it.
Here’s what you need to know though:
If the lease extension is only on your main property (for residential use), you don’t have to pay any stamp duty on the first £125,000 of the extension’s cost. Therefore, if the cost to extend the lease was £10,000, no stamp duty would be due.
Now, things add up a little differently when you have more than one residential property – e.g. when you wish to extend the lease on a second or third piece of property. In this case, 3% stamp duty is applicable. However, in order for the 3% rate to be applicable, the premium on which you’re extending the lease must cost over £40,000. If this premium is over £125,000, the rate is higher than 3%.
The above example is a very broad one when we answer the question: “how much does it cost to extend a lease?” – As such, it is meant to prepare you for what’s to come when we talk about the cost to extend a lease. So, to conclude this section of the article, we need to keep in view:
Premium and marriage value and Lease Extension Calculator
The total cost to extend lease is made up of two parts – the premium which is usually at or above £5,000 and the ‘professional fees, reasonable costs and taxes’ involved which can initially be between £2,000 and £3,000, but usually end up being a lot higher.
The premium is almost never a ‘finite fixed price’ because the final figure will come to light through the negotiations which take place between your representative (solicitor) and the landlord/freeholder.
The marriage value (if applicable) must also be taken into account and this depends on the comparable property values. Let’s quickly explain what marriage value is, in case you’re not familiar with the term: Even though a lease is treated as a ‘depreciating asset’, leases, in general, do not depreciate at a fixed or linear rate. A leasehold property’s typical sale price starts to see material depreciation only when it falls below 90 years. Therefore, if the lease has under 80 years left to run, a marriage value fee is to be paid to the freeholder, when you wish to extend the
lease. This fee covers the cost of the increase in the property’s value on which you’re extending the lease. The increase itself is referred to as marriage value.
The marriage value fee is established by calculating 50% of the property value’s increase after a lease having less than 80 years to run, is extended. Let’s practically put this into context:
Every time you extend a lease, the property’s value will typically rise if the lease has less than 80 years left to run, right? For instance, if a property is worth £120,000 with a relatively short 45-year lease, then it may be worth £175,000 if the lease is extended beyond 90 years. The £55,000 increase in value is what we call marriage value, and as we just discussed, the freeholder gets 50% of it. It’s for the same reason you’ll hear property experts telling you to extend a lease before it drops to 80 years.
With the marriage value out of the way, you may be able to get a rough estimate on the premium through a Government-funded lease extension calculator.
However, these online calculation methods may not yield an accurate value even though they are a quick and easy way to understand “how much does it cost to extend a lease”.
A competent leasehold valuation expert can easily provide a “best and worst-case” figure, valuating from both the landlord’s and leaseholder’s perspective, in order to come up with a fair and reasonably accurate value. Valuation surveyors and leasehold valuation professionals rely on their local experience to come up with an accurate value to determine the true ‘cost to extend lease’ while anticipating areas of both claim and counter-claim.
This is, undeniably, the most effective and reliable way to get an estimate and prepare well for the negotiations that follow. Your appointed surveyor is the best individual to negotiate on a fair premium price that’s due to the freeholder, so it pays to work with an experienced one.
Lease extension formula
As set out by the 1993 Leasehold Reform Act, the lease extension formula allows you to work out the total amount of capital a leaseholder has to payout (the premium) to the freeholder, once the lease extension process begins.
The formula considers any value-related losses the landlord might incur in the present and future, while also including compensation for losses as a result of granting the new lease – as well as the landlord’s portion of the marriage value.
Professional fees, costs and taxes
As we discussed at the start of this section, the combined cost of the below (even if it is initially around £3,000 or so) can easily fall in the £4,000-5,000 range:
· The solicitor’s conveyancing charges
· The valuation survey costs done by the surveyor for the lease extension
· The landlord’s reasonable legal fees (may not be so reasonable)
· The landlord reasonable survey costs for lease extension valuation
Stamp Duty Land Tax is payable at the standard rate if this is the only property you own, and the premium on that property is more than £125,000. If the lease extension is on a property that is not your main residence or not the only property you own, then there will be a higher stamp duty – e.g. 3% if the agreed-upon premium is £40,000 or above and higher than 3% if the premium is over £125,000 (as discussed earlier in this section). Therefore, the eventual cost of your lease extension is:
The premium + ‘reasonable’ professional costs pertaining to you and the landlord + SDLT liability (if applicable).
How long does it take to extend a lease?
Well, the short answer is anywhere between 4 and 12 months. The lease extension process usually takes several months because you must:
· Get valuation advice
· Serve a Section 42 Notice (if there is disagreement on the price)
· Receive a counter-notice from the freeholder –aka. Section 45 Notice
When serving a Section 42 Notice, you must give the freeholder at least two months to provide a response. Another two months are legally allowed for negotiations. Should there be any further disagreements, then the matter can be forwarded to the Leasehold Valuation Tribunal – if this happens, the lease extension process may take up to a year or more.
It is recommended that you allow ample time for the negotiations to come through and an agreement to be put in place, especially if you’re fast approaching the 80-year cut off point when marriage value will become due – or if you have plans to sell off the property.
Just so you know, a Section 42 Notice (also referred to as a Tenants’ Notice), is a legal document that must be served by a registered solicitor to your freeholder. The document acts as a formal request to extend the lease and stipulates the maximum premium you have agreed to pay (if your initial informal offer is not accepted), giving the freeholder a minimum of two months to respond.
It’s very important to work with an experienced solicitor because if a Section 42 Notice is not completed accurately and served in a timely manner, your freeholder may reject it, which means you need to wait for another 12 months before making a second attempt.
A step-by-step guide to the lease extension process
1. Work with a solicitor
The lease extension can be contentious, complicated and a lot longer than most people want it to be. Therefore, it is best that you find a good solicitor to work with from the very start.
There are companies that offer professional advice, solicitors, surveyors and valuers under one roof but if you choose to work with just a solicitor then he/she may be able to find a qualified valuer for you to help complete certain aspects of the process.
It’s also a good idea to test the market, perhaps, since different conveyancers charge different fees and if they’re particularly good at their job, then they will do everything possible to prevent the freeholder from dragging out the process – something which can quickly add up your legal costs.
Before agreeing to work with a solicitor, always ask direct questions such as the total years of experience they have working in the leasehold sector and whether they are charging a fixed fee or one based on an estimate.
2. Lease valuation
Getting valuation advice from a professional is beyond crucial! A professional valuer can advise you on what you should be paying for the lease extension and help you build a really solid foundation on which you can negotiate with the freeholder. Just so you know, valuations for lease extensions tend to cost anywhere between £400 and £900, and they are typically done remotely, unlike a valuation done for mortgaging or marketing a property.
3. Price negotiation
Negotiations begin by serving a formal notice (once an informal one has been sent) along with your opening offer in regards to what you’re finally willing to pay for the lease extensions. The freeholder will ask you to put down a deposit, which is either 10% of the lease cost agreed upon in the notice or £250, whichever value is greater. If all goes smoothly, then your solicitor will finalise the lease extension process. If not, it’s nothing to worry about. Your solicitor will serve a Section 42 Notice and, in the meantime, the freeholder will get back to you soon with a counteroffer (Section 45 Notice), which your solicitor will forward to the valuer so that the next round of negotiations with the freeholder can take place.
4. In case of a disagreement
Stand-offs in lease extension negotiations do occur, typically as a result of disagreement over the price. When that happens, you should apply to a First-Tier Tribunal to get the matter settled. When this happens, both you and the freeholder will have to incur higher legal and valuation fees – something which neither party wants. So, chances are you will reach an agreement before the need arises to contact a Leasehold Valuation Tribunal. However, if this is the only course of action left on the table, then your application will take about four months to process, after which you will be given a hearing date. The wait is typically around four months and once a hearing date has been set, your valuer will make your case. Soon after, the First-Tier Tribunal will write back to you to let you know how much you will be paying for the extension.
5. Final steps
If you’ve taken a mortgage on the property, then your lender will first need to approve the lease extension. The solicitor will now take care of any remaining paperwork and finalise the new lease extension.
Key points to remember when planning to extend a lease
Remember, as a property buyer, you cannot extend a lease until and unless you have owned the said property for a period of at least two years. The majority of mortgage lenders will not grant a property loan if the property has a short lease – we’ve established this to be around 80 years or lower, although the definition of a ‘short lease’ may vary a little between lenders.
When you purchase a property that has a short lease, you should:
· Ask the seller to extend the lease prior to purchase. This will delay the transaction by at least a few months.
· Ask the seller to initiate the proceedings, where they will assign the benefit to you upon completion.
· Purchase the property and wait two years before serving a notice – bear in mind that 50% of the marriage value is due to the freeholder once the lease dips below 80 years.
If you’re extending a lease on a shared ownership property, then remember to:
· Check with your landlord to understand their lease extension policy.
· Consider purchasing a further share in the property as it may financially be more viable.
· Extend the lease under the rights outlined in the Leasehold Reform Act of 1993 – if you initially purchased on shared ownership and have since increased your share to 100% ownership.
Most frequently asked questions about the lease extension process
What is the main difference between leasehold and freehold property?
A leasehold property like a flat or apartment is where you only own the parts of the building that you occupy and not the land or area on which the flat or apartment building sits. These are solely owned by a freeholder (unless you have shared ownership) who leases those parts that you occupy on a long-term basis. The freeholder maintains all the areas of the building or flat which you do not occupy, such as communal areas, the roof, exterior, garden, etc. and in return, you pay a service charge, ground rent and maintenance fees. With a freehold, you own both the parts that you occupy as well as the land or area on which it sits. Most houses in England and Wales are freehold, although it pays to check if you have plans to buy, particularly if it’s a new build.
Is ground rent payable on freehold property?
For any freehold that you own, ground rent is usually not payable. But if you live in, say, a very old piece of property, then there may be something called historic rent or ‘rent charge’ that’s payable to a third party. Still, it is rare as the trend appears to be frizzling out. A rent charge is a yearly amount paid by a freehold owner to a third party who typically has no interest vested in the property. You can find a broader definition of the term here.
What is ground rent and how much is it?
If you’re living in a leasehold home, typically a flat or apartment, the freeholder who owns the land on which your property sits might charge a ground rent (for using that land).
Ground rent is not the same as service charges, which is given for the maintenance, repairs and upkeep of the building you’re living in as well as its communal areas. As for ground rent charges, they are usually quite low – anywhere from £50 a year to £200 or more. Your landlord cannot increase this at his/her discretion, that is unless they have your consent or it is explicitly mentioned in the lease.
If you cannot or refuse to pay the ground rent, the freeholder/landlord can demand it as a lump sum for the last six years. However, in the event that you increase your lease in a manner that’s in line with the Leasehold Reform Act of 1993, then you do not have to pay any ground rent.
What is a Section 42 Notice and why do I need to serve it?
Also referred to as a Tenants’ Notice, a Section 42 Notice is served by your appointed solicitor to the freeholder or landlord, where it acts as a formal request to increase or extend the lease. It outlines the premium you have agreed to pay and offers the freeholder a minimum of two months to respond. It’s very important that you hire a professional solicitor to accurately serve a Section 42 Notice because if the freeholder rejects it, you need to wait for 12 months before making another attempt.
How much does it cost to extend a lease on a flat?
The combined costs are:
· The legal costs and fees are typically in the £2,400 to £4,500 range.
· The freeholder’s legal and valuation fees (considered ‘reasonable’) is usually between £1,200 and £2,400.
· The cost of the lease extension or “premium” which typically starts at £3,000 but can go as high as £4,000 to £5,000.
· If the premium is higher than £40,000 on more than one property which you fully or partially own, a 3% stamp duty or SDLT surcharge is applicable.
Just to quickly reiterate, total costs are dependent on the property’s value, how long the lease is and whether additional negotiations are needed. If the matter is referred to a tribunal, then you can add about £1,600 to your charges and legal fees.
Once you serve a Section 42 Notice but decide to withdraw your application, then additional costs and fees are applicable.
When going through the formal process, one of the golden rules to remember is that once your lease dips below 80 years, it automatically becomes significantly more expensive to extend. Therefore, the more years it has on it the better. If you need specialist advice please contact a specialist solicitor. Team House Buy Fast, the UK’s well known professional cash buyer, is there for you to chat about alternative options to lease extending. Selling your property to a property buyer might be the right starting point for you. We offer a free consultation and cash offer on the same day. Contact House Buy Fast on tel:0800 033 7853 if your lease expires soon.
Content provided by House Buy Fast is for educational purposes only as well as to give you general information and does not provide specific advice. This blog post cannot be used as a substitute for legal advice from a legal professional.