Extend Your Lease

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How to Extend Your Lease

In the UK, leasehold properties are common, especially for flats. But as your lease term shortens, the property can lose value and become harder to sell or remortgage.

Extending your lease not only protects your investment but can also improve your property’s marketability. Here’s a guide to understanding lease extensions and navigating the process smoothly.

Why Consider Extending Your Lease?

Leasehold properties in the UK are essentially long-term rentals, with lease terms often lasting between 99 and 125 years. As time goes on, however, a short lease can lead to several issues:

Property Value

The value of a property typically declines as the lease length shortens, particularly when it drops below 80 years.

Mortgage Approval

Lenders often hesitate to approve mortgages on properties with less than 70 years remaining on the lease, making it difficult for potential buyers to secure financing.

Peace of Mind

Extending your lease can offer long-term security, especially if you plan to live in or keep the property for an extended period.

When Should You Extend Your Lease?

Most experts recommend extending a lease before it falls below 80 years. Once it dips under 80 years, the cost of extending it rises significantly due to what’s known as "marriage value" — the added market value created by extending the lease, which the freeholder is entitled to share.

To avoid this added expense, it’s wise to start the process early, ideally when you still have over 80 years remaining.

Steps to Extending Your Lease

Check Your Eligibility

Under the Leasehold Reform, Housing and Urban Development Act 1993, leaseholders with over two years of ownership have the right to extend their lease by 90 years (for flats) or 50 years (for houses) at a "peppercorn rent" (zero ground rent). If you haven’t owned the property for two years yet, you can still extend the lease, but you’ll need to negotiate directly with the freeholder rather than relying on your statutory right.

Estimate the Cost

The cost of a lease extension varies based on the current lease length, property value, ground rent, and location. You can use online lease extension calculators for an estimate, but keep in mind these are general figures. Consulting a qualified surveyor can give you a more accurate picture, as they’ll assess factors like property value and local market trends. Surveyor costs typically range from £500 to £1,000.

Serve a Section 42 Notice

If you qualify for a statutory lease extension, the next step is to serve a formal “Section 42” notice to the freeholder. This notice should include essential details like your proposed premium (the amount you’re willing to pay for the extension), the new lease term, and a date for the freeholder to respond. Once the Section 42 notice is served, you are legally bound to proceed, so ensure you’re ready to follow through with the process.

Negotiate the Terms

After receiving the Section 42 notice, the freeholder has two months to either accept the offer or negotiate the terms. If they make a counteroffer, this starts a negotiation period, usually conducted through surveyors on both sides. It’s advisable to work with a solicitor and surveyor experienced in lease extensions to ensure you get a fair deal.

Finalise the Extension

Once terms are agreed, both parties will sign the new lease extension documentation, and your solicitor will register the extended lease with the Land Registry. The process from start to finish can take several months, so it’s wise to start well in advance if you’re planning a sale or remortgage.

Cost Factors to Keep in Mind

Aside from the premium you pay for the extension, there are additional costs to consider:

Legal Fees

You’ll need to pay your solicitor’s fees and, in many cases, contribute to the freeholder’s legal costs.

Surveyor Fees

Both parties often employ surveyors, with each side covering their own costs.

Stamp Duty

If the lease extension price exceeds certain thresholds, you may need to pay Stamp Duty Land Tax (SDLT).

Alternatives to a Statutory Lease Extension

If you don’t qualify for a statutory extension or want a shorter-term solution, you can negotiate an informal extension with your freeholder. This process can be quicker and more flexible but may come with higher ground rent or less favourable terms than a statutory lease extension.

Conclusion

Extending your lease is an important step in maintaining the value and marketability of your leasehold property. With a clear understanding of the process, costs, and timing, you can navigate this process smoothly and protect your property investment.