When should I be looking to extend my lease?
Solicitor John Churchill discusses the importance of lease extensions and when they are necessary.
It is important whenever purchasing a residential property to consider if your new home will be either a “freehold” or a “leasehold” transaction.
From a purely technical standpoint, when someone holds a leasehold title of a property, this provides them with all the necessary rights of possession, use and enjoyment out of the property, but does not give them absolute ownership. The ultimate title of the property continues to remain with the freehold owner, who will in normal circumstances act as the landlord under the lease. If for any reason the lease came to an end, the Property would be returned to the freeholder.
A leasehold residential property owner has the statutory right to request an extension to their lease, regardless of whether the landlord wishes to grant the same. This means that a long residential lease need not ever expire and as such residential leasehold properties are commonly sold at a high value (e.g. almost all residential flats are sold on a leasehold basis as is large parts of London and other city centres). It also means that it is possible to extend a residential lease with a short term remaining and before it runs out.
In order to extend the lease, the leaseholder will be required to pay a one-off premium to the landlord. In addition, it will also be responsible for the landlord’s costs reasonably incurred in the process before completing the extension to the lease term. It is therefore important when purchasing a leasehold property to consider the length of term remaining so you can factor in when you will need to extend the same and the likely costs associated with the same.
Before conducting any negotiations with the landlord regarding extending the lease, it is important to be aware of your rights under statute and to be aware that as the tenant you do have the right to involve the court when agreeing the premium payable to the landlord and the final terms of the new extended lease. When a leaseholder decides they want to extend the lease, there are two options open to them:-
- With agreement with the landlord outside of statutory provisions
Regardless of any statutory rights to extend the lease, a tenant is always able to approach his landlord with a view to negotiate a lease extension. If the parties can agree acceptable terms, the extension can be concluded without the need for any formal legal action.
It is standard practice for the parties to instruct professional valuers to negotiate and settle the final premium payable to extend the lease.
If a leaseholder is able to agree terms with the landlord to extend the lease, the parties can simply go ahead and execute the new documentation. If no agreement can be reach with the landlord, the leaseholder has the right to make a formal application to the court for a new lease to be granted.
- Legal proceedings under the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”)
If no agreement as to premium payable to the landlord can be found between the parties, the tenant must serve a formal notice on the landlord to trigger the statutory procedure to acquire a new longer lease through court proceedings. Whilst there is no prescribed format for this notice, it must inform the landlord of the extent of your claim (i.e. why you have the right to renew the lease), details of the new terms you wish to be incorporated into the document (including the new term) and the premium you propose to pay to the landlord.
If during the court proceedings, the parties are still unable to reach an agreement on the premium payable to the landlord for extending the lease, the ultimate decision will be taken by the Court. There is a set calculation within the Leasehold Reform Act 1993 which is used in order to determine what a fair and reasonable value for the premium should be. Two of the main considerations that the Court would take in account are:-
- The current market value of the residential leasehold property.
- The number of years remaining on the current lease term.
The shorter the lease term remaining on the lease, the higher the premium the landlord is able to charge on extending the term. In particular, once the remaining term falls under 80 years the landlord is entitled to an increasingly larger premium (known as the “marriage value” as the value of the premium payable by the leaseholder is married to the increased value of the property once the lease is extended).
Consideration before starting a lease extension
There are numerous considerations to be had before proceeding with a purchase of a leasehold property with a short lease term remaining (or when owning a leasehold property in general) and where lease extension is proposed. Whilst in no way an exhaustive list, two of the main conditions to lease extension are as follows:-
- The property must be used for residential purposes.
- The leaseholder looking to extend their lease must have been the registered owner of the property for at least 2 years.
If a leaseholder is unable to satisfy the above terms, they will not be able to submit a court application for extending the lease. As such, the only way you could extend the lease is with the landlord’s agreement. This is important when looking to purchase leasehold property, as if a lease extension is not linked into the transaction, the buyer would not be able to apply to the court to extend the lease for 2 years.
When looking to purchase a leasehold property, it is worthwhile seeking advice from your solicitor regarding the current length of the lease.
Mortgages on short leases
In addition, traditional lender criterion dictates that the term of the lease is to run for at least a further 30-40 years after the date the mortgage expires. Many high-street mortgage lenders are hesitant to offer a mortgage for a leasehold property which has less than 65-70 years of the lease term remaining.
It is always desirable to purchase a lease with as long a term remaining as possible and to consider whether it would be advantageous to extend the term of a residential lease before it gets close to 80 years remaining.
Should you have any queries or would like assistance from a member of our property team, please do contact us on 01494 773377 or email firstname.lastname@example.org.
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