Extending a flat lease – process and legal requirements

Written By Elsa (Wenjuan) NIUParalegals

 

For the most leaseholders, they would have rights to extend their lease under the 1993 Leasehold Reform Act. If those leaseholders can successfully obtain a lease extension, they would have right to be have a new lease contract with exactly same terms as previous one plus a further 90 years. In addition, the ground rent (the fees leaseholders pay annually to their freeholders) will be reduced to a peppercorn (i.e. no ground rent payable for the remaining term of the lease) under such extension. Thus, a premium will be payable for the extension.

Why should I extent my lease?

The answer is very simply, because it can add dramatic value to property’s marketing value. Generally, the shorter the lease, the lower the asking price. Once the extension is granted, it would be extend another 90 years.

The Qualifying Criteria

The following criteria must be met before exercising extension rights.

1)      The lease is held for a minimum of 2 years.  It should be noticed that the duration of leasehold ownership is not accounted from the time the property is purchased but from the date the registration as a leasehold proprietor at the Land Registry completed. Also, if a qualified tenant dies before he can exercise the rights, his personal representative can exercise the right on their behalf.

2)      The property must be held under a lease with a long term (i.e.one originally granted for 21 years or more). There is no need to live in that particular property thus. If the lease is short term lease, the extension fee can be very expensive and compete, therefore, would not be discuss here.

 

Before everything starts: Early Investigations

The following factors must be certain as soon as possible in order to ensure that potential problems are avoided:

How many years have been left?

The length of the lease term remains must be checked.  If the remainder of the term is 80 years or less, the potentially substantial marriage value will apply. Marriage value is the amount of extra value a lease extension would add to property.

Who is the competent landlord?

So called “the competent landlord” under legislation definition is the first landlord who has a sufficient authority to grant a new 90 years lease. It is also the person whom leasehold needs to serve initial notice with. Take an example; if there is a lease has 80 years left, the landlord will have to have a term of at least 170 years remaining (i.e. the length of the remainder of existing term plus the statutory extension of 90 years). Office copy entries from the Land Registry can best help to identify the competent landlord.

What is the premium?

As stated at first paragraph, premium is amount of money which is payable in accordance with a statutory formula but usually the formula only be used as a guide during negotiation. The formula is hideously complicated so in order to have a rough idea on extension cost, Lease Extension Calculator provider by Leasehold Advisory Service is useful, but bear in mind that this calculator is not the considered opinion of a Chartered Surveyor. It does not take into account all of the variables, or allow for changes in ground rent or lease irregularities. Therefore it is advisable to instruct an expert surveyor to do formal valuation.  If you want to how to calculate the premium, please see

It is very important to note that do not be tempted to state an unrealistically low premium because an unrealistically low premium stated in the Initial Notice may led to invalid this notice.

What other costs are involved?

On top of the cost of the lease extension itself, other fees include:

Legal fees

Leasehold need to pay their own legal fees, plus the freeholder’s reasonable costs (i.e. their legal fee). Importantly, this does not include the freeholders’ legal costs for negotiating the price or for dealing with court or Leasehold Valuation Tribunal applications.

Valuation fees

If a surveyor is instructed, then the valuation fees will be occurred. These valuations typically cost about £400 to £900, depending on different flat’s value.

Stamp duty

Stamp duty applies to lease extensions in the same way as any other home purchase. However, this is unlikely to affect most flats, because if the extension price is £125,000 or less, the stamp duty is avoidable.

Serve a section 42 notice

A section 42 notices, also known as initial notice can be serve to competent landlord when above investigations are completed.

The Initial Notice must contain the following:

  • Address and particulars of the property;  It is strongly suggested that to attach a plan map with notice and ensure that any ancillary property such as garages, parking spaces, gardens etc are included.
  • Details of the lease under which the property is held, including the date of the lease, the term and commencement date;
  • The Premium that leaseholder wish to offer;
  • The full name of the leaseholder;
  • The proposed terms to be contained in the new lease;
  • A date by which service of the landlord’s counter-notice is required;  This must not be less than 2 months after the date of service of the initial notice.

Landlord’s Courter Notice

The landlord will reply with a Counter Notice by the date is required on the notice, at most case  the landlord will agree the extension, but disagree with the Premium on offer, instead asking for a figure 30-50% higher.

What if premium cannot be agreed?

If Premium cannot be agreed by both parties within 2 months, they can apply to Leasehold Valuation Tribunal (LVT) to ask LVT to make a decision on the Premium payable for the extension. If neither party appeal on this decision, the judgement becomes effective within 28 days; the landlord must then provide a new draft lease within 21 days.

Once an agreement between leaseholder and landlord has been reached, both parties must enter into the new lease agreement within 2 months.

Informal extension

Alternatively, leaseholder can contact the landlord directly. This is a simpler and perhaps quicker method of extending. An informal arrangement such as this could be a good option for people who just bought their properties, because it is not an extension under the 1993 Act so there is no 2-year ownership requirement. A reasonable landlord, since he knows that he can be forced to extend after 2 years, should be willing to discuss an informal agreement.