How To Extend Your Lease

How To Extend Your Lease

If you have a lease on a home, you probably already know that it’s a legally binding contract between you and your landlord. Unlike in a situation with a freehold property, the interest a lease creates is a certain number of years and involves either a monthly rent payment or a capital sum at the outset of the lease itself. Every lease carefully states a leaseholder’s rights and responsibilities, and it also typically lays out the rights and responsibilities your landlord has as well. Maybe the most important part of your lease, though, is the fact that you only have the right to use the property for a certain period, dubbed the term of the lease. Once your lease expires, the whole property is turned back over to the landlord. Lease extensions, though, are possible, and understanding how to extend your lease for leasehold properties can help make that happen. This guide can help you explore just how to make that happen in your current property.

Understanding Lease Extensions

A lease extension is just a way to add a few extra years onto the property’s lease and ensure you can stay there a bit longer before the landlord takes over the property. There are several reasons to consider a lease extension. First, if you extend a lease that has less than 80 years on it, you’ll make your property value go up significantly. With short leases, mortgage lenders tend to be unlikely to lend against the property, making it tough to sell. As a result, typically only a cash buyer is willing to buy a property on a short lease, making a lease extension a must if you’re considering selling or even remortgaging.

Another reason to consider getting a lease extension is the fact that as the length of the lease diminishes, the cost of extending it goes up, so you want to keep that number as high as possible. What’s more, though, is that once a lease drops below 80 years, it obtains marriage value. That means that if you choose to extend it after that point, the freeholder gets 50% of the value of the extension adds to the property.

Are You Qualified to Extend Your Lease?

Not sure whether you can even apply for a lease extension? The law states that anyone who is deemed to be a qualified leaseholder is allowed to apply for the extension of a lease. Qualified leaseholders, at least in the eyes of the law, are those who have owned the property for at least two years, and those to whom the original lease was granted for a term that exceeded 21 years. If you meet those guidelines, you can push your landlord to extend the lease on terms that are relatively attractive to you.

A Quick History Lesson

In 1993, Parliament passed the Leasehold Reform Housing and Urban Development Act, which offered several new rights to qualified leaseholders. Thanks to this act, qualified leaseholders immediately became entitled to 90 years on top of whatever remains on a lease. How does that work in practice? If you have a lease with 75 years left on it, you can get a new lease of 165 years in substitution for the current lease. In return, you must pay the landlord a lump sum for the extension. The size of that lump sum will have to be negotiated, but there’s a formula in the act that helps to better define it. Several companies have even put out online calculators to help you better decide what that amount might be.

In addition to granting tenants the right of leasehold extension, the act also made several other rules for tenants. First, you have the right to know both the freeholder’s name and address. Additionally, you have the right to learn more about the insurance costs on the property itself. You also have the right to see how the service charges on your property are calculated and how that money is spent with the receipts if you ask for them. Moreover, you have the right to a Section 20 consultation about any charges if you have to pay more than £100 per year for work that lasts longer than 12 months or more than £250 for work that has been planned. You can dispute any charges you feel are unreasonable.

Another right with which you may not be familiar is the fact that you have the right to join with other tenants and acquire the freehold of the block whether or not the landlord is planning to sell shortly.

Making the Decision

Not sure whether or not you should consider extending your lease? The simple reality is that if your lease is currently below 90 years and fast moving toward that 80-year mark, you should consider extending your lease. Once you drop below the 80-year mark, you’ll find there are far greater expenses associated with the process thanks to the marriage value clause. Here’s a quick example that may help put things into perspective. Imagine, for a moment, that your property is currently worth more than £125,000 and you have a 60-year lease. When you extend that lease to 150 years, the property’s value shoots up to than £160,000. The marriage value, then, is more than £35,000, so the landlord is entitled to a payment of more than £17,500.

It’s a simple example, but it helps put into perspective exactly why you want to extend your lease before it dips below the 80-year mark.

There are times when it may not be worth it to extend the lease, though. For example, if you currently have more than 90 years left on the lease, it may not be worth the time and effort to extend it unless there’s a big saving that you can find in doing so or you’re planning to stay for several years. Likewise, if you’re reaching your senior years and you have no plans to move, you may simply want to leave the issue of the lease to those who inherit your property. Make certain, though, that your family members are aware of the fact that the lease is diminishing in years.

It may also not be worth it if someone has recently come to you asking about a plan to buy the freehold as a group, as waiting to extend the lease after that purchase has taken place could be considerably cheaper. Moreover, should the leaseholders purchase while you’re in the process, your application could be suspended?

Thinking of Selling? You Have One More Reason to Learn How to Extend Your Lease

Not sure why you’d want to extend your lease if you’re just going to sell your property anyway? One of the biggest reasons to consider it is the fact that most mortgage lenders don’t consider a property worth lending on if there are less than 80 years left on the lease. If you have more than 90 years left on the lease and you’re thinking about selling, it’s probably not worth extending the lease under those circumstances. If you’re between 80 and 90 years left on the lease, though, you’re improving your ability to sell your home quickly if you choose to extend your lease.

New owners can’t request an extension for at least two years, and if they no longer have 80 years left on the lease, it simply won’t be worth it to them to go through the process. That alone affects both a buyer’s attitude toward your property and the way a mortgage lender might look at your property.

Will Mortgage Lenders Make Loans on Properties With Leases of Less than 80 Years?

One of the biggest reasons to extend your lease beyond the 80-year mark is that anyone who wants to buy your property will need it to be there to get a mortgage. If it goes below the 80-year mark, the number of lenders willing to even consider offering a mortgage on the property is almost zero. Only a handful of lenders will consider it, and the terms of the mortgage usually aren’t very favourable to buyers. Should that lease drop below the 60-year mark, virtually no mortgage lender will consider it. That means a buyer likely won’t consider it either.

Is Buying Share of Freehold a Better Idea?

The 1993 Leasehold Reform Act also granted qualified leaseholders the right to join forces with other leaseholders to buy the freehold, even if the landlord wasn’t considering selling the property. This is called collective enfranchisement, and it may be worth it in certain situations. For example, if you’ve had issues with the freeholder in the past because of the way they’ve handled problems that have occurred on the property or because of the high charges that endlessly seem to be knocking at your doors like ground rent and insurance, becoming the freeholder could solve that problem for you. Keep in mind, though, that you’ll need to work with your neighbours to accomplish this, and you’ll have to meet certain eligibility criteria. At least half of all of the flat owners in the building must be leaseholders and want to buy in if this is to work. If there are just two flats, both of you will need to buy in to make it work. Moreover, at least two-thirds of all leaseholders on the property must have leases that are longer than 21 years.

This is a decision you’ll want to carefully consider because once it’s completely, someone will need to run the freehold company and serve as director for the properties involved. It’s best to discuss this option with an experienced leasehold solicitor if it’s an option you’re thinking about.

The Timeline to Extend a Lease

If you’re considering extending your lease, you’ll want to ensure time is on your side. You can expect to spend between four and twelve months in the process. Wondering why it takes so long? There are several steps after you place your initial application. First, the property must undergo a professional valuation. Then, a Section 42 Notice must be served on the freeholder. This is the formal request to extend your lease. Your freeholder has two months to respond to your notice. At that point, you should get a Section 45 Notice from the freeholder, which is just the counternotice. Inside, it says what the freeholder accepts from your original notice, any terms they don’t accept, and any details for the points they don’t accept. If the landlord intends to do something completely different, like redeveloping the property, the details of that will be included as well. You then have two months for negotiations.  In the event the two of you cannot reach an agreement, you have four months to apply to the Tribunal to decide on the terms or premiums involved with the lease extension. Should things get frustrating, the process itself could take nearly a year.

How Much Does It Cost to Extend Your Lease?

Many bases their decision on whether or not to extend their lease based on the costs themselves. It’s important to understand there are two pieces to the costs involved with a lease. The first is the premium. The second is the professional fees, actual costs, and taxes involved with the entire process. The premium is the biggest part of the picture. It’s tough to say what the premium might be, as that will be what you and the freeholder negotiate throughout the process. It’s based on the formula in the Leasehold Reform Housing and Urban Development Act, and while there are online calculators that will help give you a starting picture of what that might cost, there’s no calculator to tell you exactly what your landlord might want as the two of you work to negotiate final costs. Wondering a bit about the formula from the Leasehold Reform Housing and Urban Development Act? It’s the basis of that number, and it takes into account what the landlord might lose both now and in the future from granting the new lease.

This number will depend a bit on comparable property values in the area. It will also factor in marriage value if your property has a lease that has dipped below 80 years. One thing you’ll certainly want to do is work with a competent evaluator who can give you both a best- and worst-case number that comes from both perspectives so you get a sense of exactly what this might look like on paper for you. It’s the only way to get a clear estimate so you can prepare for any potential property negotiations.

In addition to the premium, you’ll be expected to pay some professional costs and fees. Typically, these run a little more than £3,000. The fees come from the cost of the conveyancing solicitor, the cost of the surveyor’s lease extension valuation, the freeholder’s legal fees, and the cost of the freeholder’s reasonable lease extension valuation survey.

Don’t forget, too, that you will also be responsible for the Stamp Duty Land Tax on this property. If this is your only property, you’ll have to pay the Stamp Duty if the premium is more than £125,000. If this is your second home, you’ll pay anything that exceeds a value of more than £40,000.

The total cost, then, comes from the premium, your professional costs and those of your landlord, and your Stamp Duty.

How Does it Work?

Convinced you’re ready to extend your lease and wondering how the process works? Start by checking to see if you’re an eligible leaseholder. Remember that your first lease on the property has to be longer than 21 years, and you must have already spent two years on the property.

Once you know you’re qualified, be sure you have the money necessary to complete the entire process. It can cost several thousand pounds depending on the property, so you don’t want to begin, incur some of those fees, and then realise you simply don’t have enough to continue.

If you don’t already know the freeholder, the next step is to learn who currently owns the freehold on your property. If you can’t find a freeholder, you’ll need to work with your solicitor to apply for a vesting order. This is simply a tool that the court uses to transfer the ownership of a piece of property to another legal entity without the formal conveyancing process. This happens any time a court can’t find the freeholder and considers it fair to transfer the property to someone else.

The next step is to choose a valuations surveyor. You’ll want to select someone who is an expert not only in leasehold properties but also in your local property market. Much of the value of your property will depend on extensive knowledge of the properties around you. Those located in neighbourhoods with good schools, excellent transport links, and lots of local shops tend to be worth far more than those in other areas. As a result, selecting a surveyor who understands the market in your area is a must. Additionally, you’ll want to choose someone who is a member of the Royal Institute of Chartered Surveyors, or RICS. You may also want to select someone who is a member of the Association of Leasehold Enfranchisement Practitioners, or ALEP.

Once you’ve selected a surveyor, it’s time to begin working as a solicitor. Here, choose someone who has quite a bit of experience in extending leases and someone who is currently a member of ALEP. Naturally one of your biggest considerations here should have cost. Fees vary widely across the UK, and while the services are typically the same, the costs aren’t. Selecting a firm outside of central London could mean paying far less than you might in London. As you search, it’s okay to speak with solicitors directly. Work to learn more about their experience with lease extensions. Those who don’t have the necessary knowledge may not be able to get you the extension you want that the price you want. You’ll also want someone who has some experience weighing both the pros and cons of any deal a freeholder might offer. After all, the last thing you want is to end up costing yourself more than you really should in the long run.

The next step is to select your approach. At this point, it’s best to learn how to ask your landlord to extend your lease. If you know your freeholder, you could personally discuss a lease extension with them. In many cases, this is the right way to move forward. Your freeholder may be more likely to agree to a lower lease extension premium with only a small increase in the ground rent, which could help you out in the entire process. If you don’t know your freeholder, though, or you feel uncomfortable speaking to him or her directly, it may be more advantageous to have your solicitor handle this step.

If your freeholder is ready to move forward with the process and the two of you can reach a fairly easy agreement, it’s okay to make an informed offer. Should he or she choose to accept that offer, you can then turn it into a formal offer with the help of your solicitor and pay a deposit. If, on the other hand, they didn’t accept your informal offer or you decided to work with your solicitor initially, a Section 42 Notice must be served on your freeholder. The freeholder will then serve a counter notice – that Section 45 Notice discussed earlier – with alternative terms or outright reject your request. Should that happen, you’ll work with the Leasehold Advisory Service to work things out. You may also need to apply to the First Tier Tribunal or Leasehold Valuation Tribunal. Keep in mind that should you have to do either of these things, you’re making the process significantly longer and more expensive.

In either situation, the final step in the process is that your solicitor finalises the lease extension, thus ending the process.

A Few Things to Consider

If you’re thinking about buying a property with a lease or you’re thinking about extending your lease, there are several things you’ll want to consider. First, understand that as a buyer, you can’t extend a lease for at least two years. What’s more, is the fact that you likely won’t be able to get a mortgage on a property that doesn’t have a lease that is for more than 80 years. Some lenders will give you a loan should the property have a shorter lease, but even the meaning of the term short lease can vary from lender to lender. If they will give you a loan, it may be worth it to get the seller to extend the lease. While that can slow things down significantly, it may mean you reap the benefits. A seller can start proceedings and assign the benefit to you on completion, but that’s not always the case, so be sure to explore that option if you’re considering it.

Another thing to note is that the process of extending a lease works in the same fashion no matter what type of property you have. Whether it’s a flat, an apartment, or even a maisonette, you’ll go through the same process as a whole.

Extending a lease on a shared ownership property may work a bit differently, though. If you have this type of property, be sure to check with your landlord to learn more about their lease extension policy. Keep in mind that it may make better sense financially to purchase an additional share in the property rather than extend the lease, so speak with a solicitor or a financial advisor to learn more about the best path forward to meet your needs. If you originally purchased this property on a shared ownership basis, but you’ve increased your share since you bought it to 100%, you’ll certainly want to consider extending the lease as you might with any other property.

Remember that just because you apply for a lease extension doesn’t necessarily mean the actual terms of the lease (outside of its length) will change. For example, if you’re applying for a lease extension and you hope to add-on to the property, the lease may still not allow you to do so. In cases where you intend to make those kinds of changes, be sure you talk to the freeholder about your plans so you know whether extending the lease is truly worth it to you.

Typical FAQs About Lease Extensions

If you’re thinking about extending your lease, much of the information above can help you do so. Here are a few highlights, though, that pertain to questions many people have about lease extensions.

How Long Should the Lease Be to Get a Mortgage on a Property?

If you’re working to get a mortgage on a flat or even a maisonette, mortgage lenders tend not to loan on properties that have less than 80 years left on the lease. Some won’t even loan you money if there are less than 85 years left on the lease. Check with a mortgage lender if you’re considering purchasing a flat to learn more about what they do and don’t consider necessary in terms of minimum lease requirements.

Do Shared Ownership Properties Qualify for Lease Extensions?

While the Leasehold Reform Act of 1993 made obtaining a lease extension far easier, it did not address the concerns of many who were in a shared ownership situation. In fact, with shared ownership of property, you simply may not have the rights others do. You can check with your freeholder, as he or she may have a policy regarding lease extensions in these situations, but unless you increase your share in the property until it is 100% yours, you cannot extend your lease. Moreover, once you increase your share to that point, you must keep it there for at least two years before you’ll be entitled to extend your lease.

Is Extending the Lease on a Flat Costly?

Whether you’re extending the lease on a flat or a maisonette, there are always four main costs in the process. The first is your legal costs and fees. Those can be as high as £5,000 depending on the professionals with whom you work. The second category of costs is the freeholder’s legal costs and fees. Those can run you about the same overall amount. The third category of costs involved is the premium itself. That’s essentially the cost of the additional lease term. Your valuation and the formula in the Leasehold Reform Act are what help to determine what the premium might be. It could be as low as £3,000, but it could cost far more. Finally, the fourth category of costs involved is the Stamp Duty you must pay on the property. If this is your only property, you’ll only be responsible if the value of the property is greater than £125,000. If, however, this is a second property, you’ll be liable for 3% if the premium exceeds £40,000. Keep in mind that if your freeholder disputes any of this, you can expect additional costs in Tribunal fees. Additionally, should you withdraw your application after you’ve served a Section 42 Notice on your freeholder, you are still responsible for the involved costs and fees.

What is Ground Rent?

If you’re considering extending your lease, you’re likely to come across the term ground rent at some point. Those who won leasehold homes, typically flats and apartments, don’t always own the ground it sits on. Instead, your freeholder may own that ground, and they may charge you ground rent for it. This is different from a typical service charge, as those are designed to cover maintenance and repairs when it comes to common areas. Ground rent isn’t always expensive – it could be as low as £50 per year. The reality for some, though, is that it’s far more expensive. Fortunately, a freeholder can’t increase that ground rent unless you agree to it or it is listed to increase in the terms of the lease itself. Keep in mind that if you haven’t paid your ground rent, your freeholder can demand it for up to the past six years, and they can demand the payment be made in a single lump sum. If you apply for a lease extension, however, you will not have to pay ground rent.

How does Leasehold Enfranchisement Fit In?

In the 1993 Leasehold Reform, Housing, and Urban Development Act, Parliament said that leaseholders had the right to work together to purchase the freehold, even if the landlord didn’t want to sell. This process is called Leasehold Enfranchisement or Collective Enfranchisement. To make it happen, though, at least half of the leaseholders have to be willing to participate in the process itself. If just two flats are involved, both have to be willing to make the purchase. Additionally, at least two-thirds of the leaseholders have to have leases that were at least 21 years when they were originally made. This process can’t happen, though, if you’re a landlord who owns two flats on the block. It also can’t happen if more than 25% of the building is used for commercial or retail space. If you do decide collective enfranchisement is right for you, you’ll need to appoint a freehold company and directors to manage the property from that point forward.

Is My Property a Leasehold or a Freehold?

If you own a property, and you own both the building and the land, you have a freehold property. Most homes in the UK are freehold properties. If you own a flat or an apartment, though, and you only own those parts of the building that you live in, not the land or the areas around it, you have a leasehold property. Those spaces are owned by the freeholder, and he or she leases them to you for the long term. In return for that lease, he or she agrees to maintain those common areas which could include the outside of the property, the garden area, or anything else. You are responsible for ground rent, service charges, and maintenance fees.

How Do I Find Out Who My Freeholder Is?

If you don’t know your freeholder, you are entitled to that information. Typically, you can find out who owns your property with a quick visit to the Land Registry Website. There you’ll just plug in the address of the property and pay a nominal fee to download the leasehold title, which should include the information you need. That said, this information should have been part of the original documentation you got when you bought the property, so checking that paperwork or calling your solicitor is likely the best place to start first.

What’s a Long Lease?

Not sure whether your lease is long or short? Most people consider a long lease to be at least 90 years or more. Once it shrinks to less than 80 years, you’ll find a much smaller property value. If you’re talking about legal terms, though, a long lease is anything that exceeds 21 years. You can only extend your lease if it was originally for more than 21 years.

If Your Lease Runs Out

If you choose not to extend your lease and it runs out, the property reverts to the freeholder. The simple truth, though, is that unless the landlord serves you notice to leave, it’s possible to live there on the same terms, but that’s not always the case. The landlord may choose to negotiate new terms or do something else entirely with the property, which is why it’s most beneficial to you to extend the lease if you think it’s right for you.

While this guide only covers extending the lease on your property, in the UK, it is also possible to extend other kinds of leases. If you currently lease your vehicle, knowing how to extend your car lease might also be helpful. Doing some research on how to extend your lease on your car may be the right way forward if it’s going to run out shortly, so do some reading on that type of lease extension as well.

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