Extending your lease under current legislation

Why extend my lease?

Remember, as a leaseholder, you don’t own your property. As the lease gets closer to expiry, the value of the lease decreases and it becomes more expensive when you extend the lease especially when you consider “marriage value”.

In practice, marriage value kicks in the when the lease term reaches 80 years. Marriage value is the increase in the value of the property following the completion of the lease extension, reflecting the additional market value of the longer lease. In that this potential ‘profit’ only arises from the landlord’s obligation to grant the new lease, the legislation requires that it be shared equally between the parties.

Additionally, many lenders will not lend money on lease terms of less than 80 years and that number increases once the term goes below 70 years

Routes to lease extension

Informal Route

Under this route, a leaseholder can approach the freeholder and enquire as to whether they are interested in negotiating a lease extension. There is no obligation on the freeholder to respond or to agree to extend the lease following this request. If the freeholder agrees then both parties will have to negotiate.

It is worth starting the process informally as it could save time and money. But if negotiations fail, then leaseholders who comply with the criteria, can use the formal route to try and extend their lease.

Formal Route

Extend your lease by 90 years – The Leasehold Reform, Housing and Urban Development Act 1993

The Leasehold Reform, Housing and Urban Development Act 1993 gives lessees the right to surrender the existing lease and acquire a new lease on their property.

The new lease will be on the same terms as the existing lease except for the following:-

The ‘new’ lease will be at a ‘peppercorn’ ground rent (effectively no ground rent)
The new lease will be for a term expiring 90 years after the end date of the existing lease.

This means that if the lessee is paying £200 a year ground rent at the moment they will no longer have to pay this. If the existing lease were to have an unexpired term of 65 years the new lease would be for a term of 65 + 90 years (i.e. 155 years).

To obtain a new lease the lessee will have to pay a premium to the landlord and this is calculated in accordance with Section 13 of The Leasehold Reform, Housing and Urban Development Act 1993. The premium compensates the landlord for the fact that they will no longer receive ground rent and they will not get possession of the flat when the original lease expires. Generally the shorter the existing lease the higher the premium for the new lease will be.

To be a qualifying leaseholder you must have owned a long lease for the past two years. A long lease is defined as a lease which had an original term of over 21 years when it was originally granted. How long is left on the lease is not relevant.