When, why, and how to seek an extension to your leasehold

Extending your lease can add value to your property, but it can be a complicated and (sometimes) costly process.

But in an exciting bit of news, the government unveiled reforms this year to make it ‘easier, faster, fairer and cheaper’ for the 4.5 million leaseholders in England and Wales to obtain lease extensions up to 990 years at zero ground rent.

The timeframe for any changes have yet to be clarified, but if these proposals are codified into law they could save leaseholders thousands of pounds and offer long-term property reassurance.

(Note: this information pertains to England and Wales. The law is slightly different in Northern Ireland and Scotland.)

Who’s allowed to seek a lease extension?

Leaseholding is the most common form of flat ownership. It’s also not unusual for newbuild houses.

To own a leasehold on a property is to essentially rent that space -- but not the building itself -- for a fixed amount of time. At the end of that period -- say, 90 years -- the property reverts to the freeholder.

Read more: Leasehold vs. Freehold: What’s the difference?

The rules on lease extensions, as noted, are in flux. But at the time of writing, any leaseholder who has owned the property for at least two years can demand a lease extension up to 90 years from the freeholder.

If you haven’t yet owned the property for two years, then you can still enter into an informal (‘non-statutory’) agreement with the freeholder if they’ll agree to it. If the freeholder agrees, then both parties will need to negotiate the terms. Be aware, however, that informal agreements tend to offer fewer leaseholder protections than formal ones.

Regardless, if you’re considering extending your lease, be sure to obtain good legal advice.

What are the benefits of extending a lease?

Most property experts recommend extending your lease once the fixed period falls below 90 years.

But, why bother, when few leaseholders will live that long? The main benefits include:

• Properties with long leases are worth more on the market than ones with shorter leases.
• It’s frequently more difficult to obtain a mortgage on a property with a shorter lease.
• It can be more challenging to sell a property with a shorter lease.

Read more on our blog: Is it hard to sell a leasehold property?

It’s true, however, that lease extensions can be complicated and often expensive, so they’re not for everyone.

You may decide against going the lease extension route if:

• Your current lease already covers more than 90 years. Any value added to the property may be negligible compared to costs incurred in seeking the extension.
• You don’t have much extra cash on hand to spend on a lease extension, which could cost thousands of pounds.
• You intend to sell and move on from your property soon anyway.
• You’re going to buy the entire freehold, which would probably render moot the question of extending your lease.

When should I get a leasehold extension?

Generally, the shorter the lease, the more expensive it is to extend.

So it’s critical to act quickly to ensure your lease doesn’t fall below what experts say is the critical 80-year mark.

Lease extensions grow very expensive once your lease term falls to 80 years or less because various fees kick in on top of the usual price of an extension. Every year below 80 can potentially cost leaseholders hundreds -- perhaps thousands -- of pounds.

Mortgage rates also begin to increase significantly once leases are closer to around 70 years. Leaseholds under 60 years are virtually impossible to mortgage, which makes them extremely difficult to sell, or remortgage if you’re planning to stay put.

By the time the lease falls to zero years, the property is nearly without value because the entire property will then just revert to the freeholder anyway.

How much does a lease extension cost?

The costs of lease extensions vary considerably but you should plan for at least a couple thousand pounds to get it done.

The actual costs depend on a number of variables, including:

• Property value
• Lease length
• Value of any property improvements
• Ground rent

Leaseholders considering extensions should also factor in the other fees that kick in, such as:

• Legal fees
• Valuation fees
• Your freeholder’s legal and valuation costs (this is legally required)
• Land Registry fees
• Stamp duty (if applicable

How to get a lease extension

Although the steps are pretty straightforward, they can take some time to get through.

The basic four-step process could be as follows:

• Find a solicitor who can offer specialised advice
• Value the lease with a surveyor
• Negotiate the price with the freeholder (probably through your solicitor)
• If the parties aren’t able to agree to terms or a price, you’ll need to apply to a tribunal, formally known as a First-tier Tribunal (Property Chamber)

How long will it take to extend the lease?

The whole process should take at least a few months, though it could extend to a year (or perhaps longer).

As with all property matters, having good legal representation can speed this process up considerably.

Should I buy the freehold instead of extending my lease?

This will be the right decision for some people, but it depends on a few factors.

Namely, buying a freehold can frequently be an expensive and frustratingly complicated legal process. Be certain you have the money and patience to see it through.

It’s even more complicated if your property is located, for instance, in a building divided into flats. In that case, you’ll need to persuade more than half of all leaseholders to acquiesce to the sale, which could be tricky.

What’s included in the 2021 proposals for lease extensions?

According to some analysts, if the current lease extension proposals are made into law, they would constitute the most significant reform in the leasehold system in four decades.

In addition to the measures mentioned above, other significant changes include:

• Leaseholders who become freeholders won’t have to pay ground rent.
• Costs like ‘marriage value’, which is defined as the increase in property value once the least has been extended, will be abolished.
• More fair and transparent rates for calculating the costs of an extension or a freehold purchase will be set.
• An online calculator to help leaseholders understand the cost of extending their lease or buying their freehold will be introduced.
• New protections for people buying leasehold retirement properties will also come into effect.

You can find some useful resources online, including the government’s leasehold site and the Leasehold Advisory Service, which offers free legal advice.