Ownership of a long residential lease is a valuable asset. However, as the lease term decreases over time, so does the value (and saleability) of your property. It can also affect your chances of securing the best mortgage deal.
Leases are granted to the leaseholders for a set term such as 99 or 125 years. Once your lease has less than 80 years left, something called ‘marriage value’ applies to any valuation, which makes the lease considerably more expensive to extend – and reduces the value of your property.
The good news is that you CAN extend your lease, whether informally or through the statutory route, as the lease extension specialists at Brady Solicitors explain.
When should I start the lease extension process?
If your lease is approaching the 80-year mark, then we would recommend you start immediately to secure a lease extension.
Even if you are not looking to sell your property, you may want (or need) to refinance it – and the number of years remaining on your lease may prohibit you from doing this, as most mortgage lenders will want a lease with a minimum of 30 years to run after the mortgage term has expired.
Options for extending your lease
Leaseholders can choose to extend their lease through the formal route (governed by the Leasehold Reform Housing Urban Development Act, 1993), or through an informal approach to the freeholder.
We explain each option below and set out the key aspects you need to consider for each. For help or advice on any aspect of lease extensions please do get in touch for a confidential conversation about your situation.
Formal lease extensions
By law, you are entitled to extend your lease for a further 90 years.
To proceed down the formal (also called statutory) route you must have been listed at the Land Registry as the registered owner of your property for at least two years.
The lease extension will grant you the additional 90 years on top of the unexpired term of your current lease and will reduce your ground rent to a peppercorn rent, meaning that no ground rent is paid.
The formal lease extension route also allows for some limited amendments to the lease, such as removing obligations that no longer exist, and correcting manifest errors.
If you have a mortgage over the property, there is no need to seek the consent of your lender to the lease extension.
Key considerations for formal / statutory lease extensions:
The lease extension process begins with a formal notice being served on your freeholder. This notice sets in place a strict timeframe governed by the Act and, if deadlines are missed, your lease extension application may fail – and you would be liable for the freeholder’s costs to date.
Formal lease extensions can take a long time to complete; the freeholder has two months to respond after being served the notice, and then there is still the period of negotiation to go through with regard to the terms of the new lease and the premium to be paid.
It is also worth noting that the premium payable to the freeholder for granting the additional years may be higher on a formal extension due to the loss of future ground rent income the landlord would receive.
Informal lease extensions
Unlike formal lease extensions with the two-year ownership rule, you can approach the freeholder for an informal lease extension at any time during your ownership of the property. The aim of the approach is to agree the additional years to be granted, alterations to the ground rent, premium payable, and any other changes to the lease you both may wish to make.
Informal lease extensions are more flexible, the term of additional years can be as low or high as you wish as long as agreement is reached on this.
The lease extension premium would usually be lower than via the formal route as ground rent is likely to still be payable during the extended lease term
Informal lease extensions are usually faster, as there are no fixed procedures to follow.
Key considerations of informal lease extensions
Whilst the annual ground rent may be reduced, it may also be increased – so you do need to be aware of any impact such an increase may have.
If you have a mortgage over the property, then you will need to seek consent from your lender, which incurs additional costs.
Which route is right for you?
If you have a good relationship with your freeholder, then it is often worth considering the informal route first as it is usually faster, cheaper and more flexible. However, negotiations are not always successful, and it can lead to an increase in ground rent. The good news is that, if you can’t reach agreement through the informal route, you do still have the right to apply for a formal lease extension.
If an approach is made to your freeholder but an informal agreement cannot be reached, you do still have the right to apply formally.