More than 4 million residential properties in the UK are owned as leaseholds. This being the case it’s easy to see why so many want to know how much does it cost to extend a lease?
The owners of these properties have the statutory right to extend the lease on their house or flat.
Extending a lease can often be a great idea, especially if the term of the lease is becoming short. Ultimately, a lease extension helps maintain a property’s value and gives the leaseholder the certainty of being able to stay in place.
This guide explains how leasehold property works, why you are entitled to extend your lease, when you would want to and the process for doing so. We also help leaseholders avoid the many potential pitfalls involved.
Leasehold property explained
There are two ways property is normally owned in the UK: Leasehold and Freehold.
Freehold property is held directly and unconditionally from the crown, while leasehold property is held by a lessee, who has bought the right to use it exclusively for a certain duration of time from a freeholder.
Buying leasehold property has a number of advantages over buying the freehold or renting it on a short-term basis.
- The purchase price of leasehold property is substantially cheaper than buying freehold.
- Leaseholders are not responsible for organising major maintenance such as roof repairs or arranging building insurance. They will however pay towards the buildings insurance policy.
- Leaseholders have an assurance that they will be able to stay in the property for a defined duration, which is not the case with a short-term tenancy.
The defined duration in which a leaseholder has an interest in a property is known as the term of the lease. This can be anything up to 999 years, though normally it is substantially less and is often set at 125 years.
Leaseholders can sell the leased property to whoever they like. Upon purchase, the buyer will effectively inherent the term remaining on the lease.
While lease holding has some downsides, including ground rent and service charges, its suits millions of people in the UK and a leasehold can be a fantastic step on the property ladder.
When can you extend a lease?
Lease extension is often possible in the UK due to legislation brought in as part of the 1993 Leasehold Reform and Urban Development Act.
Following the act, if a properties original lease term was longer than 21 years, it is legally considered a long lease. The lease can be unilaterally extended by an eligible leaseholder in exchange for a payment to the freeholder.
This means an eligible leaseholder does not need the freeholder’s permission to have their lease extended.
A leaseholder is considered eligible after they have leased the property for two years or more.
How much can you extend a lease by?
Eligible leaseholders are entitled to buy a lease extension of 90 years if they own a flat and 50 years if they own a house.
Currently this is the only amount a lease can be extended by. This works well for most leasehold properties. However, changes are being planned that enable homeowners to buy up to a maximum 990-year extension.
The UK Government have committed to changing the way this works by the end of the current parliament (2024). But as with all politics, whether this happens remains to be seen.
Why should you extend a lease?
There are a number of reasons for a leaseholder wanting to extend a lease.
These can range from wanting to increase a property’s value to the certainty of being able to stay in property.
On top of this, a new lease will have a maximum ground rent of £0 (a peppercorn)—although part of the cost of extending a lease goes towards paying this off.
In addition, extending a lease can make a property much easier to sell, for reasons discussed in the next section.
When should you extend a lease?
There are various times when it is a good idea for a leaseholder to extend their lease.
For example, when the duration of time left on the term of a property’s lease falls below 60 years it becomes almost impossible to mortgage it. This is because lenders see a possible risk in the future saleability of the property.
A short lease can mean it is difficult to sell a property. Only cash buyers, who are normally looking for a bargain, will be able to buy it.
If you can afford it, it can be a good idea to extend the lease when there are just 60 years or less left on it as this will increase the property’s resale value.
However, if possible, you should extend your lease well before this point.
If the remaining term of a lease is less than 90 years but more than 80 years, extending the lease can save the tenant quite a lot of money.
When extending a lease with less than 80 years left, a leaseholder is obligated to pay their freeholder an additional premium, called marriage value.
Extending a lease can take between three months and a year, if things go right. Make sure you start well before the 80 year mark is coming round.
You can check the remaining term of a lease by downloading a copy of the leasehold title from HM Land Registry at a cost of £3.00.
Alternatively, the solicitor who helped with the leasehold property’s original purchase should still have a copy of the title in their conveyancing files.
How much does it cost to extend a lease?
The cost to extend a lease can be broadly divided into five parts. These are:
- The premium paid to the freeholder
- Any marriage value payable to the freeholder
- Land Registry Fees
- The freeholder’s legal and valuation costs
- And the leaseholder’s legal and valuation costs
How much should a lease extension premium be?
Unfortunately calculating a lease extension premium is, quite frankly, an arcane art.
This depends on factors including:
- the value of the leased property
- the duration left on the lease
- the annual ground rent
- the value of any improvements conducted by a leaseholder
- and even external factors, such as the current rate of return on investments.
Ground rent is paid off entirely and reduced to a peppercorn charge (£0) when extending a lease. Lease extensions on properties with high ground rents can be more expensive.
The best person to calculate the value of a property is a surveyor registered with both ALEP (The Association of Leasehold Enfranchisement Practitioners) and RICS (The Royal Institution of Chartered Surveyors).
The condition of the property is disregarded. And so normally a surveyor can do this job simply through looking at the buildings plans and at recent transactions on the local market.
As many of the things used to calculate a lease extension premium are subjective and down to an expert’s interpretation, it is highly likely that the eventual premium a lessee and lessor will come to will require negotiation.
The UK Government is looking at changing the formula for how leasehold extension premiums are calculated in the near future. This forms part of a lease extension reform. Unless a lease is approaching 80 or 60 years remaining it may not be worth extending yet.
How much should marriage value be?
Marriage value is payable to a freeholder for a lease extension if there is less than 80 years remaining on the lease’s term.
This is a hard cut-off point. So if a lease has 79 years and 364 days remaining, a substantial amount of marriage value will have to be paid, compared to zero if the lease term was a day longer.
A leasehold’s marriage value is calculated by taking the amount the leasehold increases in value following the extension and splitting it in two.
Half of this profit theoretically goes to the leaseholder as their property increases in value, but the other half must be paid to the freeholder.
This can be a very substantial amount, with properties increasing in value by tens or potentially hundreds of thousands of pounds, meaning extending a lease before the 80-year mark becomes vital. Ultimately, the extension of lease cost can be a no-brainer if a property’s value is to increase substantially.
Future UK Government reforms are considering changing the way marriage value works. Potentially this could be soon. And so if you just missed not paying it, you may not want to jump to extend your lease quite yet.
Do I need legal representation or a professional surveyor?
Many of the factors used to calculate the lease extension premium and marriage value are subjective, so negotiations on price are likely to be necessary.
It is strongly recommended that you hire a specialised lease extension solicitor and surveyor to help with these negotiations. They should both be registered with ALEP.
The surveyor will value your property. By choosing a valuer who works on a fixed fee basis, you could save a substantial amount of money. While deals such as percentage of savings offers exist these are rarely worth it.
It is also recommended to hire a surveyor and solicitor who exclusively work on leaseholds. This is because if they have regular freeholder clients they may not be as keen to employ leaseholder friendly arguments.
While informal negotiations conducted without legal representation are allowed, and in theory a leaseholder can save substantial amounts of money this way, doing things formally protects them from several tricks which can be pulled by the freeholder.
While, due to reforms in June 2022, freeholders are no longer able to increase ground rent when extending leaseholds, they can still leave in any pre-existing ground rents, including scheduled rises, as well as only granting extensions back to 99 or 125 years, rather than the guaranteed 50 or 90 terms leaseholders can obtain following the formal process.
In addition, other “modernisations,” a term often used to cover changes to a lease that normally benefit the freeholder rather than leaseholder, may be included in an informal lease extension.
Unless you trust your freeholder implicitly, it is generally better to take the formal route and have an experienced leasehold solicitor at hand.
Calculating the legal and valuation cost to extend a lease
Under current legislation, the leaseholder is obliged to pay both their own and the freeholders’ legal and valuation costs.
This can get quite expensive. While a leaseholder can shop around for a reasonable quote, the freeholder is under no obligation to do so.
Surveyors can cost anywhere from £500 – £1,200 depending on the property and location. Solicitors are more expensive, often charging between £1,200 – £2,400 for the leaseholder and £600 – £1,200 for the freeholder.
Fortunately, freeholders must pay for their own negotiation’s costs, so it does not benefit them to drag the negotiations on.
What happens when the leasehold expires?
The first step of negotiating a lease extension is to contact your freeholder and tell them that you intend to pursue the statutory route to extending your lease.
Your freeholder may try to negotiate an informal deal. Do not accept this unless advised to do so by a solicitor. It is likely to contain clauses that will not benefit you as a freeholder.
Next, consult with your solicitor and surveyor, and have them serve the freeholder a document called a tenant’s notice. This will contain a formal offer based on their assessments of the property. This will normally be on the lower side.
Your landlord may ask you for a deposit at this point. This can be as much as 10% of the renewal premium specified in the tenant’s notice, or £250, whichever is greater.
If your freeholder does not accept your initial offer, they will provide a counteroffer. This is sometimes absurdly high. After this, both you and your freeholders’ valuers will exchange their calculations to see where this difference comes from.
After this, your negotiators will debate the points here, showing evidence that supports your side. Usually, both sides make some concessions at this stage and a deal is agreed.
If your freeholder is being unreasonable your solicitor might advise you to take the case to the First Tier Property Tribunal. Threats of Tribunal are fairly common, but it is rarely used in reality as it is expensive and both sides pay for their own costs.
It can be worth hiring a solicitor with a recent record of taking cases to tribunal in order to show your freeholder that their threats are serious.
Once negotiations are complete you must complete the legal paperwork needed to reflect the changes in the lease.
Usually, your solicitor will write a short legal document referring to your lease which shows the lease extension and the now peppercorn ground rent.
Working out how much does it cost to extend a lease can appear daunting at first glance. However, extending your lease can pay dividends under some circumstances. This is particularly the case if the term remaining is approaching 80 or 60 years. It can lead to a leasehold property’s value skyrocketing, remove arduous ground rents, and enable a sale or re-mortgage that would be otherwise unachievable.
While current legislation makes a specialist conveyancer and surveyor almost entirely necessary for the process, and the duration of time taken can often be painful, extending a lease can be a very rewarding goal.
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