How to extend your lease in the UK?

This second blog in a series of blogs attempting to explain in layman’s terms the process of extending your lease, whether for a flat or house. Please see our previous blogs in this series and also all other blogs which are intended to help you understand this complex piece of legislation.

Which legislation covers the extension of a residential lease or purchasing the freehold of a block of flats?

There have been many statutes that govern issues surrounding flats and houses over the years. The current ones that are relevant are “Leasehold Reform, Housing and Urban Development Act 1993” for flats and “the Commonhold & Leasehold Reform Act 2002” for houses.

Who can apply for a lease extension?

In order to exercise your rights under either of the above statutes you now only need to have owned (not necessarily lived in) the property for at least 2 years.

How long can I extend my lease for?

Although you are free to agree to any extended term between freeholder and leaseholder the default positions, in the absence of agreement, are as follows.

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For a flat you can extend your lease for an additional 90 years (e.g if you currently have 67 years left on your lease your extended lease will end up with 157 years on it).

For a house you can extend your lease by 50 years (so using the example above your extended lease will end up with 117 years on it).

What are the qualifying criteria?

As mentioned in our first blog certain criteria have to be met in order for you to qualify to have your lease extended.

For flats:

          You have to have owned the flat for at least 2 years;

          Your ownership of the flat must be held  under a qualifying lease;

          A qualifying lease is one that is for a fixed term of at least 21 years;

          The property which you wish to extend must be a “flat” as described under the definition;

For houses:

          You must be the tenant of the whole house unless you are already the freeholder of those parts of the house of which you are not the tenant.

          A qualifying lease is one that is for a fixed term of at least 21 years;

          You have to have owned the house for at least 2 years.

          Your rent must be classed as a “low rent”. The definition of this is quite complex and so please contact us for further guidance.

What rent do I end up paying after the lease extensions?

Regardless of what ground rent you were paying before the lease extension for a flat your rent will decrease to effectively NIL.

I say effectively because under the legislation the ground rent reduces to a peppercorn which is equivalent to £1 per year but landlords very rarely charge this as it become uneconomical to do so.

For a house extension your rent will change to a “Modern rent”. A “modern rent” is the market rent as on the date of valuation for the site (not including the house or any other buildings on it).

The method of valuing this “modern rent” is extremely complicated and so please contact us for further advice if required

How Lease Extension works in UK?

This is the first of a series of blogs that will try to explain, in layman’s terms, how the process to extend your lease is undertaken for lease extension purposes.

We will not cover every single type of lease nor every single possible situation, as that will simply not be possible during a short blog. However, if there are any questions you may have that aren’t covered in these blogs then please feel free to contact us for a free friendly professional consultation.

A separate series of blogs will explain the process for a freehold purchase (or enfranchisement to use the correct terminology).

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In order to understand how valuations are undertaken it is necessary to understand a bit about the background, not only the process of extending your lease, but also how the law evolved to get us here and why certain processes need to be followed correctly in order to ensure a successful outcome.

The type of lease extensions we will be discussing are only the ones relating to residential properties (flats and houses) and only applicable to properties in England.

Leases of commercial premises (shops, warehouses etc) are governed by different legislation and are totally different in the way they are valued and calculated.

What is a lease?

A lease is a legal document between the landlord of a flat/house (hereinafter called the Lessor) and a tenant (hereinafter called a Lessee) that gives the Lessee a right to own the flat/house in question for a specified number of years (usually 99 years and above but it can be any length over 21 years). During the term of the lease it is quite normal to pay a ground rent, which may or may not increase periodically throughout the term.

For example, a typical lease may be for an original term of say 99 years paying £50 per year for the first 33 years and then increasing to £100 per year for another 33 years and then £150 per year for the final 33 years.

What is a lease Extension?

At any time during the term of the lease the lessee can exercise their legal right to extend the lease by an additional 90 years. So, for example, if you have 50 years left on your lease you can extend it to 140 years (50+90) and reduce your ground rent to effectively NIL for the whole 140 years.

However, before embarking on this process certain criteria must be satisfied. These criteria will be expanded on in the next blog.

In order to start the process certain notices have to be served and the landlord must be compensated for the loss to his investment (i.e. the landlord will receive less rent and also has to wait a further 90 years to get his property back).

Who pays the fees?

As the lessee is requesting the extension the legislation states that the lessee is responsible for both his/her own surveyor’s and solicitor’s fees as well as the landlord’s “reasonable” fees. We suggest you allow a budget of say £3,500 for all fees.

So, as you can see, this is not a cheap process but getting the correct professional advice from the outset is important if you want to extend the lease for as little as possible, with the least amount of complications and receive the correct advice.

Some people choose to opt for professional advisers who are perhaps cheaper but as the saying goes “you get what you pay for”.

To get the right advice from experienced professionals, who will also guide you through this Complex process please contact us.

What is Leasehold Enfranchisement?

What is Leasehold Enfranchisement?

Leasehold enfranchisement is the process you go through to either extend your lease, or purchase a share of the freehold (collective enfranchisement). When you buy a leasehold property, you enter a legal agreement with the landlord known as a lease.

Leasehold Enfranchisement is the statutory process by which qualifying tenants on long leases have the right to renew the term of their lease or acquire the freehold of their building.

When a leaseholder either extends their lease or purchases the freehold to their property, they receive an “enhanced interest” in the property. Therefore, they must pay a premium to the landlord to be able to benefit from this interest.

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As the law currently stands, there are three elements to calculating the premium for leasehold enfranchisement:

Reversion – to compensate the landlord for the fact that they will not be able to take back possession of the property for another 90 years (in extension) or ever (in enfranchisement).

Term – To compensate the landlord for the lost ground rent to which they would have been entitled if the lease ran for the full term at the current rates payable.

Marriage Value or Hope Value – extensions of leases under 80 years will attract Marriage Value or Hope Value. Marriage Value is based on the assumption that the freehold interest and leasehold interest in a property are worth more together than their respective parts. The difference between the value in single ownership and the value in separate ownership is the Marriage Value. Hope Value is a deferred form of Marriage Value. It is based on the “hope” that if the freeholder sold the freehold in the future, the third party might realise the Marriage Value, and is a lower monetary value than Marriage Value.

What is a collective enfranchisement?

Collective enfranchisement is the process by which the leaseholders in a building join together and buy the freehold. This right to do so comes under the Leasehold Reform Housing & Urban Development Act 1993.

Reforming valuation in leasehold enfranchisement published by Law Commission

Reforming valuation in leasehold enfranchisement published by Law Commission

The Law Commission of England and Wales has [09 January 2020] published a report setting out options to reduce the cost that leaseholders have to pay to buy the freehold or extend the lease of their homes (known as “enfranchisement”). The reforms have the potential to make the process easier and more affordable for millions of leaseholders across England and Wales.

The Law Commission’s report puts forward a range of options to make it cheaper for leaseholders to buy their freehold or extend their lease. As well as reducing the price, these options can clarify and simplify the law, making the process of leasehold enfranchisement easier and less expensive to operate.

The Government asked the Law Commission to review the law of leasehold Enfranchisement in order to promote transparency and fairness in the residential leasehold sector and provide a better deal for leaseholders. On valuation, the Law Commission was asked to provide options to reduce the premium (price) payable for existing and future leaseholders to enfranchise their homes, whilst ensuring sufficient compensation is paid to landlords to reflect their legitimate property interests. The report examines the method by which the value of the landlord’s interest is calculated, to identify reforms that could lower premiums without breaching the UK’s human rights legislation that protects the landlord’s property interests.

The options for reform

The report puts forward three key schemes for determining the premium, each of which will make enfranchisement cheaper, saving leaseholders money. Each scheme uses a different method to determine the price of enfranchisement and allow further reforms to make the process simpler and to reduce uncertainty. 

The report also explains the role that simple formulae – such as a multiple of ground rent – could play in delivering reforms, while explaining that their wider use is not possible under the UK’s human rights laws.

Alongside the three schemes, the Law Commission has put forward a range of other options for reform. These include:

Prescribing the rates used in calculating the price, to remove a key source of disputes, and make the process simpler, more certain and predictable.

Helping leaseholders with onerous ground rents, by capping the level of ground rent used to calculate the premium.

The creation of an online calculator for determining the premium to make it easier to find out the cost of enfranchisement, and reduce uncertainty around the process.

Enabling leaseholders who are collectively enfranchising a block of flats to avoid paying “development value” to the landlord unless and until they actually undertake further development.

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Professor Nicholas Hopkins, Property Law Commissioner said:

We were asked to provide options for reform that save leaseholders money when buying their freehold or extending their lease, while ensuring that sufficient compensation is paid to landlords. This is what we’ve done.

We are ready to help the Government in implementing whichever options for reform they choose.

Housing Secretary Rt Hon Robert Jenrick MP said:

I welcome these proposals from the Law Commission which provide options to make it simpler and faster for leaseholders to buy their freehold or extend their lease.

I will consider the proposals outlined in this report carefully and set out our preferred way forward in due course.

“We have already committed to addressing the abuses of leasehold seen in recent years, by reducing ground rents to a peppercorn level and limiting new leasehold to apartments, save in the most exceptional circumstances. The Competition and Markets Authority is examining the alleged misselling of leasehold properties and I will also await their findings with interest.”

Next steps

We consulted widely in putting together the options for reform. Leaseholders have advocated sweeping reform to lower the cost of enfranchisement of their homes. We have heard contrary arguments from landlords and investors – including charities and pension providers – the value of whose interests would fall if premiums are reduced.

The Law Commission doesn’t hold views on which scheme and which other options for reform should be adopted, as this is ultimately a decision for the Government.

The Law Commission will be making further recommendations in the coming months for reforms to improve the current complex enfranchisement system.

We will also be publishing reports on reforms to make common hold a viable alternative to leasehold, and on improvements to the law that gives leaseholders the right to manage their properties.

What you know about Leasehold Valuation Calculator?

One common question we get asked is what is my lease extension cost? how can I know that value? For that we added a tool to our website that allows you to get an idea as to the cost of your lease extension. To use our lease extension calculator simply fill out the required information and our easy to use calculator will produce an estimate and give an estimated value for your property.

We have recently added a tool to our website that allows you to get an idea as to the cost of your lease extension. So it made sense for this information to be available to the public to use.

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And another question we get asked is ‘how accurate is your estimate?’

The answer to this is that the calculator is reasonably accurate, in so far that it is useful to obtain an initial estimate but it is still only a ball park figure. In order to gain an accurate figure we will need to undertake a details valuation.

The calculation is only an estimate and doesn’t qualify as professional advice. The calculation doesn’t take into account future changing ground rents, specific details related to the property, specific issues relating to a location nor if there’s an intermediate lease involved.

In addition to our free calculator ​Leasehold Valuations offers a range of leasehold and freehold valuation services and solutions to both Landlords and Leaseholders, depending on your requirements and objectives.

How much will it cost you to extend your lease? Get an estimate using our lease extension calculator.

The first step within the lease extension process ​is to have a valuation carried out to assess the likely premium payable. even if you choose to proceed with a voluntary lease extension we might advise you to still take valuation advice to make sure the premium your freeholder is voluntarily offering is a “good deal”.

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