Statutory Lease Extension : Why it should be considered

What is a Statutory Lease Extension?

Most flats in England and Wales are sold as leasehold, so if you own a flat you probably have a Lease – a contractual agreement between the Leaseholder and the Landlord or Freeholder.  The lease gives you conditional ownership of a property for a set period of time.

The content of the Lease will also agree the Leaseholder covenants, conditiozs and obligations (formal promises to do or not do something) such as payment of Ground Rent and maintenance costs and what the Landlord must also be responsible for, such as maintenance and insurance.

The particular amount of time that a lease is granted for is known as the ‘term’ and is a diminishing asset – losing value over time as the length of the term decreases.

A Statutory Lease Extension allows a Leaseholder to add 90 years onto the term remaining on their Lease. If your current Lease has 80 years left on it, then the extended lease would be for 170 years.

Why should you consider a Lease Extension?

As the years left on the Lease decrease, so does the value of the property. Not only that, but the amount that you will have to pay the Freeholder to extend the term of the Lease is likely to increase.

When buying a leasehold property, a prospective buyer should look at the number of years left on the Lease. Anything under 80 years will be considered undesirable as the Lease would need to be extended at a cost. It may also be more difficult for a prospective buyer to obtain a mortgage on the property, as some lenders will not offer a mortgage if the Lease has only a short time remaining. A Lease Extension may therefore be required to simply sell the property.

The Statutory Lease Extension process

There are two routes that you can take to extend your Lease:

1. A Voluntary Lease Extension

This is an informal process where a Leaseholder can approach the Freeholder directly to negotiate a Lease Extension. This is particularly beneficial if you have a good relationship with your Landlord/Freeholder, as this informal agreement can be cheaper and faster in the short term, avoiding immediate legal costs. You can also potentially agree on more flexible terms in the Lease.

If you are considering this option, do however consider that a Landlord/Freeholder may overcharge you to extend your Lease, only agree to a short term Extension or increase your Ground Rent charges in future – all factors which could impact you financially and affect the ability to sell your property in the future.

2.  A Statutory Lease Extension - a formal process

If you can’t agree an informal Lease Extension as the Leaseholder you have the option of a formal Statutory Lease Extension under the Leasehold Reform Housing & Urban Development Act 1993 (as amended).

Who qualifies for a Statutory Lease Extension?

As the Leaseholder, you qualify for a Statutory Lease Extension if you have owned the flat for two years. You can then add 90 years to the term of the Lease and pay no further Ground Rent.

The amount you need to pay to Extend your Lease is calculated by a surveyor using a formula set out in the Act.  This amount is then included in the ‘Section 42 notice’ that you serve the Landlord/Freeholder.

The shorter the Lease, the more expensive it will be to Extend. It is not advisable for the term of the lease to fall below 80 years as the cost increases further with the Leaseholder having to pay a ‘marriage value’ to the Landlord.

Ideally you should instruct a specialist Conveyancer to serve the Section 42 notice upon the Landlord/Freeholder who then has two months to respond. The Landlord’s/Freeholder’s counter-notice will say whether they accept the Extension and the price.

If the Landlord/Freeholder accepts your right to extend the Lease, but disagrees with the price offered, then either side can apply to the First Tier Tribunal (Property Chamber). If the matter hasn’t been settled 6 months after the counter-notice has been served, you then have to withdraw the Extension Notice, waiting a year before you can apply again.

The Leaseholder is liable to pay the Landlord’s/Freeholder’s legal and surveying costs incurred in granting the extension of the Lease.

What are the benefits of a Statutory Lease Extension?

Whilst the Statutory Lease Extension process might take between four months to a year to complete and may be more costly upfront, you have more capacity to negotiate the Extension price. Also, the amount of Ground Rent payable will also be reduced to a ‘peppercorn’ – essentially zero.

Leaseholders are often unaware they have a legal right to extend their Lease after two years, but it is a financially viable option.

Which is the best option to extend my Lease?

The informal route may seem appealing as you seem to be saving on valuation and legal costs, but it can prove to be a false economy in the long term.

The benefits of keeping the process formal with a Statutory Lease Extension include:

• You save money as your Ground Rent is reduced to zero for the duration of the Lease. An informal arrangement could mean your Ground Rent is increased
• You are protected – if things go wrong you can go to a Property Tribunal
• You can obtain a longer Extension – thereby saving money for future extensions
• Your property is more appealing to prospective future buyers with a longer Lease and no Ground Rent
• You can save on waiting time – if you are buying a Leasehold property you can ask the seller to start the Statutory Lease Extension process for you

Who is eligible for a Statutory Lease Extension?

If you have owned the property for more than two years and it was sold for a Lease with longer than 21 years, you are eligible for a Statutory Lease Extension.

You can avoid the two year rule when buying if the seller has owned the property for more than three years and begins the process for you, assigning the benefit of the Statutory Notice to you.

Is there anything else that I should know before starting the Lease Extension process?

• Selling your property during the process

If you choose to sell your property after you have served a Statutory Notice for a Lease Extension then you have to make sure the benefit of the notice is assigned to the buyer before completion of the sale, otherwise the cost of the process will be wasted as obviously they will not be eligible, having not owned the property for the required two year period.

• Evidence of title

The Landlord/Freeholder may also request that you provide evidence of your title to the property. This must be provided within 21 days of the request.

• A deposit

You may need to pay a deposit. The Landlord/Freeholder may request a deposit of 10% of the premium proposed in your Notice once your Notice has been served and this has to be paid within 14 days of the request.

• Your new Lease