Lease Extensions Q&A: what you need to know

A recent survey conducted this November revealed that a huge proportion of property leaseholders in the UK do not know enough about lease extensions, leaving them vulnerable to escalated costs.

Almost all flats and apartments in England and Wales are leasehold properties, however, around 36% of leaseholders do not know that the length of their lease at all, which is critical to its value and saleability. As a provider of professional property services in the South East: one of the busiest property markets in the world, Austin Gray administer lease extension advice to homeowners on a daily basis. Here are some of the most commonly asked questions we receive.

Why are lease extensions so important now?

During the 1990s, developers tended to grant an average lease term of 99 years, therefore many leasehold properties will need a lease extension now to avoid falling below 80 years. All leaseholders should keep a record of the length of their lease term as leases below 80 years become much less marketable.

Why is the length of the lease important?

By the time a lease term drops below 80 years, the property will have begun to lose value and gaining a lease extension will become a lot more expensive. If a leaseholder does not extend the lease before it falls below 80 years, they will required to pay the freeholder additional compensation when extending in the form of ‘marriage value’. The 80 year rule is one of the most important to remember.

Lenders will normally need a lease to run for 25-30 years beyond the end of your mortgage. If your lease is below 70 years old, you may struggle to get a mortgage which can seriously affect the resale of the property. The Council of Mortgage Lenders publish a list of lender’s lease length requirements and increasingly a minimum lease term of at least 60 – 70 years is stipulated by lenders. As buyers become increasingly aware of this issue leases of at least 99 years are preferred in the market.

Do I need to qualify for an extension?

Leaseholders can ask for an extension at any time and if the freeholder is unwilling to sell you can exercise your right to extend. If your lease is longer than 21 years and you have owned the property for more than two years as a ‘qualified tenant’, you have the right to extend the lease by 90 years at Nil ground rent. The freeholder is always entitled to fair compensation for granting a lease extension. You will require a Leasehold valuer to help ensure you pay the appropriate price.

How do I obtain a lease extension?

There are two ways to obtain a lease extension. The first is sometimes referred to as the ‘voluntary route’. This is an informal exchange between the freeholder and the leaseholder’s representative. The leaseholder’s valuer simply talks to or writes to the freeholder to ask how much the extension will cost and attempts to negotiate a settlement price. If this route is unsuccessful the statutory route can be pursued. This route is triggered by instructing your solicitor to serve a section 42 notice under the Leasehold Reform Act 1993 (as amended). You will first need to obtain a valuation so that the solicitor knows what price to place in the notice.

What are the pros of each route?

The informal process can be less costly in Legal costs from start to finish and it is often quicker than the statutory route (which can take several months). On the other hand, if the voluntary route is unsuccessful the statutory route will be required in any case and so there is a risk that the voluntary process can cause delay. The process can take several months so you should approach a Leasehold valuer well in advance of selling your flat.

If you choose the formal route, you will have opportunities to modernise the lease for today’s mortgage purposes. Service charges can also be higher on an older lease simply because less people took action against inflated rates in the past, therefore you this can be an area for negotiation during an extension process. A leaseholder has the right to see a summary of what service charges are spent on and how they have been calculated.

How is an extension cost calculated?

The extension cost will be based on present value to the freeholder by assessing future ground rent over the course of the existing lease, coupled with the present value of what the property would be worth by the end of the lease based on current market projections, otherwise known as the ‘reversionary value’.

Some freeholders will pluck a value from the air without consultation and leaseholders can accept this. If you wish to make an offer first, you should hire a solicitor who will service a section 42 notice that will represent your formal offer. Both sides must adhere to a timetable and cost rules. If the freeholder would like an independent valuation they can then charge a leaseholder for reasonable costs, including his valuation fees and solicitor fees to reach a value. Austin Gray can refer you to specialist solicitors if needed.

Where do I go if I need to challenge my freeholder?

When approaching a freeholder directly for a valuation the price may be inflated and ground rents can be raised without making adequate concessions. If you have an irresolvable dispute with your freeholder the dispute can be settled at the First-tier Tribunal Property Chamber (formerly known as the Leasehold Valuation Tribunal (LVT) which will handle the case.

If you require the expertise of a lease extension service, head to www.austingray.co.uk/professional-services for advice and guidance.