The two most common ways to buy property in the UK are freehold and leasehold.
- Buying freehold means that you own the building and the land on which it stands outright – this is common for standalone properties such as houses
- Buying leasehold means that you aren’t buying the property, but rather the right to use the property for a fixed number of years from the freeholder. Leasehold is common where several properties share a building, such as flats. It is also common to pay a ground rent and service charge towards the cost of maintaining the building
With a leasehold property you would normally extend the lease rather than giving the property back at the end. The lease extension process can be complicated and time consuming so in this article the Backhouse Solicitors property specialists answer some common questions to help you avoid the pitfalls.
1. Why should I extend my lease?
As each year passes and the overall term of your lease reduces, so does the value of your property. Many lenders will not provide mortgages for leasehold properties with less than 65 years remaining and there are several whose cut off point is much earlier. If you have a particularly short lease, you are limiting the saleability of your property to cash buyers only.
Once the term of your lease falls below 80 years, premiums payable for the extension become much more expensive as “Marriage Value” kicks in. Marriage Value is the increase in value of your property following the Lease Extension. This potential profit is viewed as arising only due to the Landlord’s obligation to grant a new Lease, and so the “profit” (whether realised in a sale or not) must be shared equally between Landlord and Tenant.
Both these factors mean that the shorter the lease, the less you will make when you sell.
2. How do I know if I can extend my lease?
There are two key criteria required for a successful extension application: –
- You need to have been the registered owner of the property for at least 2 years, starting from the date your ownership was registered at HM Land Registry
- When the Lease was originally granted, it must have been for a term of at least 21 years
3. How do I start the process of extending my lease?
If you satisfy the required criteria, you are entitled to extend your Lease by 90 years via one of two options:
- Leasehold Reform, Housing and Urban Development Act 1993
Extending on this basis is called the “statutory procedure”. To start the process, you must serve a notice on the Landlord requesting the terms of the extension, and the Landlord will then have at least 2 months to respond. If terms cannot be agreed, you are entitled to refer the matter to the First Tier Tribunal within 6 months of the Landlord’s counter notice, and the Tribunal will determine the terms of the extension.
If you obtain a lease extension under the statutory procedure, you will only have to pay a “peppercorn rent” going forward, meaning no ground rent at all.
- Private Negotiation
Your Landlord may be open to negotiating the terms of the extension directly with you. If you proceed on this basis, you do not enjoy the same protections as under the statutory procedure meaning that ground rent may still be payable as well as other maintenance costs. We would always recommend you instruct a solicitor to assist with these negotiations on your behalf so that you don’t end up with a bad deal.
4. What other terms will change?
The simple answer – nothing. The Leasehold Reform Act determines that the new Lease must be on the same terms as the existing Lease, though there are a few exceptions. For example, if the property has changed physically since the Lease was first granted, or if Service Charge provisions were not drafted properly to allow the Landlord to fully recover the costs of repair/maintenance/buildings insurance.
5. How long will the lease extension process take?
This will depend upon which procedure you wish to follow. The timescale from instruction to completion will normally be between 5 and 8 months, so you should take this into account if for example you are thinking of selling.
6. Do I need to involve my mortgage provider?
If you have a mortgage over your property, your lender will need to consent to the terms of the extension and will look to ensure their charge remains secured.
7. How much will it cost to extend my lease?
Typically the costs will include:
- The premium payable for the lease extension (determined by a valuer)
- Your valuation fees
- Your legal fees
- The landlord’s legal and valuation fees
- HM Land Registry costs and registration fees
- Stamp Duty Land Tax dependent upon the premium
- Potential mortgage administration costs
This may appear expensive but investing in a lease extension before the term gets too low will save you money in the long term and improve the return you will receive when you sell.
8. Is there anything that might stop me from being able to extend my lease?
Yes, there are a few things:
- where there is an underlease to your lease (you have sublet the property to someone else) you cannot extend your lease if there is already an extension of the underlease in progress
- where the property is commercial
- if the landlord is a charitable housing trust
- if you have made a claim for a lease extension previously you must wait at least 12 months before starting the process again.
9. I don’t know who my Landlord is, can I still extend my lease?
Your solicitor should be able to help track down who holds the freehold title of your building. If the Landlord cannot be found, you are entitled to apply to the Court for a Vesting Order for a lease extension. To be able to make this application you need to be able to prove your entitlement to the extension and prove that you have made every effort to track down your Landlord.
10. What documents do I need to have in order to claim an extension?
First and foremost, a Lease Extension Valuation Report which can be obtained from a qualified surveyor. You will also require proof of ownership of the property and a copy of your lease.
For more information regarding the lease extension process, please contact a member of our property team for a free initial consultation. Whether you’re a leaseholder seeking to extend your lease or a freeholder trying to negotiate a new term, our property experts will guide you through each step.
The Backhouse Solicitors Property Team
Tel: 01245 893400
Email: [email protected]