A lease extension is a legally binding agreement between a freeholder and a leaseholder. It allows the latter to stay in the property for a different length of time. Having a lease extension in place can increase the property value and make it easier to sell.
The process of extending a lease can be long and costly. The cost of a lease extension varies significantly, depending on the property value, the length of the lease, the ground rent due, and the freeholder’s attitude.
The property value after the lease extension is also taken into account.
If you’re reading this and thinking, “Oh no! My lease is nearing the end of its term!”, then don’t worry.
You can sell your property with a short lease if you decide not to extend it.
Table of Contents
What is a Lease Extension?
Owning a leasehold property means you have the right to live there for a predetermined amount of time, rather than owning the land it is located on. The land is owned by a freeholder or landlord who charges a ground rent.
Leases are generally for either 99 or 125 years, and at the conclusion of this period, the flat is usually returned to the freeholder or landlord. However, most leases are extended prior to the expiration of the set term.
Extending the lease comes at a cost, as the freeholder is entitled to a premium. This is due to the fact that extending the lease means they must wait longer to take possession of the property, and no ground rent will be payable.
When Should You Extend your Lease?
You should aim to extend your lease before it reaches 80 years or less. This is for two reasons: firstly, the cost of lease extension rises more rapidly when there are fewer than 80 years left; secondly, it becomes harder to secure a mortgage when the lease has less than 70 years left.
If you are planning to sell your property or will do so in the future, a short lease is likely to put off potential buyers. Therefore, it is best to extend the lease before you start to market your home.
The amount of the lease extension premium will depend on the value of the property. The more expensive the property, the higher the premium will be. So, if you can, it is wise to extend the lease when house prices are decreasing.
However, you can sell your property with a short lease to us.
How Much Does it Cost to Extend a Lease?
The cost of extending a lease on a flat with 80 years left can range from around £7,000 to £10,000, plus other fees. If the lease is extended, the flat is likely to be worth around £400,000, and the ground rent will be £100 per year.
The following table provides an estimate of the costs associated with a lease extension.
Item
Typical Cost
Lease extension premium
£7,000 – £10,000 (using the earlier example)
Your surveyor’s valuation
£600 – £900
Your solicitor’s fees
£600 – £1,200
The freeholder’s valuation
£600 – £900
The freeholder’s solicitor costs
£600 – £1,200
Surveyor’s negotiation costs
£150 – £200 an hour
Land Registry fees
£20 – £40
The Leasehold Advisory Service provides an online calculator to give you a rough indication of lease extension costs. It’s a great way to estimate what the costs may be before making any decisions
The lease extension premium
The cost of the premium will depend on several factors, such as:
- The location and value of the property,
- The length of the lease,
- The ground rent payable, and how negotiations with the freeholder go.
Surveyor’s Fees
You’ll need to hire a specialist surveyor to work out your initial offer to the freeholder. This requires complex calculations, as well as a visit to the property. The valuation could cost anywhere from £600 to £900, depending on your property’s size and value.
Once the freeholder has made a counteroffer, your surveyor will negotiate with them until they agree on the premium.
Solicitor’s Fees
Your solicitor’s fees could be around £600 – £1,200 on average. Your solicitor will issue your Section 42 notice to the freeholder and will be notified when the freeholder’s solicitor sends back a Section 45 notice.
Your solicitor will read the new lease to ensure everything is accurate and submit it to the Land Registry.
Freeholder Costs
The Leasehold Reform Act dictates that the leaseholder must cover the freeholder’s reasonable expenses for extending the lease.
The freeholder is unlikely to search for the most affordable surveyor or lawyer since they don’t have to pay the costs. This means their expenditure may be higher than yours.
How to Keep Your Lease Extension Costs Down?
If you want to keep the cost of extending your lease low, here are some top tips to keep in mind:
- Start the process as soon as possible before your lease drops to 80 years. After this, you may be required to pay a fee known as ‘marriage value’ to the freeholder, making the lease extension significantly pricier.
- Hire a specialist surveyor and a specialist solicitor to handle the process. Cutting corners on professional fees may lead to you overpaying for the lease extension.
- Avoid informal lease extensions. Your freeholder might offer an informal lease extension rather than one that follows the Leasehold Reform Act rules. However, an informal extension does not necessarily add 90 years to your lease or reduce your ground rent to zero. A dishonest freeholder may use an informal extension to increase the ground rent, making it difficult to resell the property in the future.
Why Should You Extend a Lease?
If your lease has not yet expired and the remaining term is less than 80 years, then it is important to get it extended. This is for two main reasons.
- It will help to maintain or even increase your property’s value. This will make it easier to sell or re-mortgage, as it is hard to get a mortgage if there are less than 70 years left on the lease. A short lease may deter potential buyers.
- The cost of extending the lease is primarily based on the property’s value and the length of the existing lease. Once the lease drops below 80 years, the cost of extending it increases significantly.
Therefore, it is wise to extend the lease before the 80-year cut-off point if you want to save money.
Rights granted under the Leasehold Reform Housing and Urban Development Act 1993
Qualified leaseholders are eligible for an extra 90 years on top of the remaining lease term, with no rent to pay throughout the whole term. In this case, if 75 years are left to go, a new lease of 165 years (90 plus 75) can be granted instead of the existing one.
In exchange, the Landlord is entitled to a ‘premium’ (a lump sum of cash) as compensation for the lease extension. This premium is subject to negotiation and is based on a formula outlined in the Leasehold Reform Housing & Urban Development Act 1993.
How Do You Extend Your Lease?
The Leasehold Reform Act 1993 sets out the legal procedure for extending a lease. It gives qualifying leaseholders the right to get a new lease for an additional 90 years on top of the current lease’s expiry.
So, if they have 80 years left, they can acquire a 170-year lease (90 + 80).
To qualify, individuals must own the property for a minimum of two years and the initial lease must have been longer than 21 years.
Once the lease has been extended under the Leasehold Reform Act, the property will no longer have to pay any ground rent.
5 steps to extending a lease
- The first step in extending a lease is to get a specialist surveyor to do a valuation. This involves complex calculations that take into account the current length of the lease, the property’s location, ground rent, terms in the lease, and the value of the flat with and without the lease extension.
- The surveyor will provide an opening offer to the freeholder.
- Section 42 ‘Tenant’s Notice’. This will start a two-month timetable during which the freeholder must respond. Don’t be surprised if the freeholder’s opening offer is twice as much as your own – your surveyor will then negotiate with the landlord’s surveyor to reach an agreement between both sides.
- If an agreement cannot be reached within two months, an application to the Leasehold Valuation Tribunal (LVT) can be made. The LVT can decide on a fair price for the lease extension, but this is an expensive process.
- Once an agreement has been reached, a solicitor will be needed to do the necessary paperwork and draw up a new lease. After both parties have signed, the conveyancing solicitor will register the new lease with the Land Registry. Save on Your Valuation Report
How long does it take to extend a lease?
Expect the lease extension process to take 4-12 months. This is because it entails getting valuation advice, serving a Section 42
Notice to the freeholder, and receiving a counter notice (Section 45) from the freeholder. In the Section 42 Notice, you must give the freeholder at least two months to respond. An additional two months are allowed for negotiations.
If an agreement cannot be reached, the matter will be referred to the Leasehold Valuation Tribunal, resulting in a process that could take over a year.
Buying the Freehold
Buying your freehold is a great alternative to extending your lease. If you live in a block of flats, at least half of the other leaseholders must agree to purchase the freehold collectively.
This is known as ‘collective enfranchisement’. It can be a lengthy process, but it is worth it in the end. With the leaseholders owning the freehold, they will have a greater influence over how the building is managed and the costs for upkeep.
Additionally, just like extending a lease, your ground rent will be reduced to zero.
Should I extend my lease before selling?
It all depends on how much time is left on your lease and when you need to sell. You should think:
- If you have more than 90 years left, it’s not worth extending the lease.
- If you have between 90 and 85 years remaining, it’s worth extending it as it will make the property more saleable.
- If you have between 85 and 80 years left, you should either extend the lease or get the process started. This is important because the new owner won’t be able to request an extension for two years. If that happens, the lease may be shorter than 80 years. In this case, it would be much more expensive to extend and could reduce the value of the property.
When the lease has fewer than 80 years left, the number of lenders willing to offer mortgages against the property decreases. Only a few lenders will lend, and the terms may be less favourable (e.g. lower loan to value and a higher rate). If the lease has fewer than 60 years remaining, it may be impossible to get a mortgage of any type.
What is the lease extension formula?
The Leasehold Reform Act 1993 outlines the formula for extending a lease. This formula is used to calculate the amount of capital – known as the ‘premium’ – that the leaseholder must pay to the freeholder.
The formula takes into account the possible losses to the landlord, both present and future. This includes the compensation for granting the new lease and the landlord’s share of the marriage value.
Does lease extension affect saleability?
If the cost of extending the lease is too high for you, it might be time to start looking at selling the property.
As we mentioned before, a short lease can affect the saleability of a property, as very few mortgage lenders are prepared to lend, meaning the pool of potential buyers is restricted to those who can pay in cash.
- Finding a cash buyer on the open market can be difficult, as most people need to use a mortgage to purchase. This significantly limits your options when it comes to selling. We will buy your property for cash.
- Another option you may consider is selling your property in an auction. At the auction, there is a chance of finding the right buyer for your short-lease property as buyers are looking for different properties than those available on the open market.
- If you are successful in finding a buyer at the auction, they must pay a deposit immediately and complete the transaction within 28 days. This makes for a faster sale, allowing you to avoid the cost of ground rent, service charges and other fees associated with leasehold properties.
- The downside to selling at auction is that you will need to pay fees such as room hire, commission fee, and a fee to the auctioneer. Although these costs may not be as high as those of extending the lease, they still add up. There’s no guarantee you will find a cash buyer, leaving you with no sale but fees to pay.
- We not sell to us? We are cash property buyers. We’ll complete in 10 days.
Sell to us!
At Property Saviour, we are cash buyers of houses, no matter where they are located or how short the lease is. With over 50 years of experience, we are well-prepared to handle any situation.
We take care of all the fees, including legal expenses, so you can sell your short-lease property without worrying about any additional costs or saleability.
All we need is a single viewing of the property, and we will make you a guaranteed cash offer. Plus, we can have the money in your bank account within as little as 7 days.
If you want a guaranteed cash buyer without having to think about the cost of extending the lease or how a short lease might influence saleability, give us a call or fill out our online form today.
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- The price we’ll offer is the price that you will receive with no hidden deductions.
- Be careful with ‘cash buyers’ who require a valuation needed for a mortgage or bridging loan.
- These valuations or surveys result in delays and price reductions later on.
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