Time to extend your lease?

Almost all flats in England and Wales are “leasehold”. This is to ensure that obligations, such as respecting neighbours by not playing music late at night, automatically pass from owner to owner of flats unlike with freehold where they must be passed on through the preparation and signing of additional paperwork.

Where houses are converted, often the owners of the two or three flats also own a “share of the freehold”. In larger purpose-built buildings, there is often a commercial freeholder who appoints managing agents who run the maintenance and repair of the buildings and employ cleaners and gardeners to keep the communal areas tidy and in good condition.

A lease is granted out of the freehold for a certain number of years, usually between 99 and 999 years.

When the Lease term falls below 80 years there are a number of issues that arise, due to the requirements and law that govern extending leases, the main being:

  1. Buyers who need mortgages: If you sell to a buyer who needs a mortgage, if the term is below 80 years, the lender will ask for it to be extended before it agrees to release funds to be secured against the flat. Sometimes, where sellers find it difficult to extend their lease, you will see the flat advertised for cash buyers only.
  2. “Marriage value”: Once the term falls below 80 years, the party paying to extend the lease must pay for the additional years but also, at that point, start paying the freeholder 50% of the increase in value of their property that directly results from extending their lease.

How to extend the term:

There are two options:

  1. If you own your leasehold property for more than 2 years, you are legally entitled to extend the lease using a prescribed process set out in the Leasehold Reform, Housing and Urban Development Act 1993.
  2. If your freeholder agrees to extend the Lease, you can avoid the statutory procedure set out at point 1 and enter straight into a deed that ends the old lease and grants a new lease. If you own a share of the freehold, this is the best procedure to use, as you and your neighbours own the freehold you can grant each other longer leases without having to go through the above longer, and sometimes more costly, procedure.

Lease extensions can be costly; if the freeholder is charging too high a premium, leaseholders can apply to the Leasehold Valuation Tribunal for a decision upon the fairness of the premium.

The key is to address the issue sooner rather than later, and certainly before the lease term falls below 90 years.

The law and practice referred to in this article has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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