User friendly guide to residential lease extensions
If you are buying, or have bought a residential lease, it will be for a specific period of time, which is known as the term of the lease. When that term comes to an end, the property goes back to the landlord.
Yes, that’s right, no matter how much you paid for your flat, if you are living in it when the lease expires, you will have to move out and the landlord takes over and doesn’t pay you anything for it!
In practice, it’s not nearly as bad as it sounds.
It’s very rare to buy a short lease (it’s unusual to buy a residential lease for less than 80 years for reasons we’ve explained in more detail below) and if you had bought a short lease, you’d have almost certainly picked it up very cheaply, and your conveyancing solicitor would have warned you of the risk at the time.
Even if you have bought a short lease, or you’ve been in occupation for a long time and your lease is getting on the short side, you can extend it, and we’ve set out the process below. However, you will need to meet certain requirements and there are costs involved, although the extension will increase your property’s value, so it is likely to be a worthwhile exercise.
How can I extend my residential lease and for how long?
Assuming that when it was originally granted, the lease term was at least 21 years, you can apply to your landlord to have it extended at any time, provided that you have owned the property for at least two years. There is no requirement for you to have lived in the property during that two year period, simply that you were the registered owner.
What is the legal route to extend my residential lease?
In order to extend your lease formally, you will need to make a formal application, also known as serving a ‘section 42 notice’, which will include the terms you are proposing for the new lease. The notice will need to be served on your landlord and will set out that you are asking for a 90 year extension and saying how much you are willing to pay for that extension.
After a lease extension is granted, the new lease will not give the landlord the right to ground rent, so the amount you are paying for the extension is aimed at compensating the landlord for the loss of that ground rent.
If the lease has less than 80 years to run, you will also have to pay 50% of what is called the marriage value, which is the increase in the value of the property, as a result of the extension.
That’s why it’s unusual to sell a lease for less than 80 years, because it can cost so much more!
The landlord has two months from receipt of your application to respond by either agreeing that you can extend your lease or opposing the extension. He can also say whether or not he agrees with your proposed terms of the extension and the price you have offered and if not, how much more he wants.
It's not uncommon for the parties to agree that the leasee is entitled to the extension they are seeking, but to be unable to agree on the terms.
The most common aspect to be unable to resolve is the value of the extension.
Whatever the points of dispute, if an agreement cannot be reached by negotiation either side can apply to the Lands Tribunal to make a decision, although no application can be made to the Tribunal until at least two months after the landlord responds to the extension application.
Are there any alternatives to the formal process?
Another way in which you can extend your residential lease is to have a private discussion with your landlord, which can be quicker and cheaper in terms of the costs which we’ve outlined below.
For example, the freehold is owned by the residents, it’s quite common for them to want to do things fairly and amicably, as they themselves might want to do an extension one day, and they will want you to be cooperative towards them! Local authorities are also often very easy to deal with, and don’t require the formal process to be undertaken.
If you are doing things informally, you can negotiate with your landlord for any number of years you wish to extend the lease for and more favourable terms for the new lease too.
However, if you decide to go down the route of negotiating with your landlord the extension of your lease, there is always the risk of your landlord refusing to extend your lease or setting terms that they like but you might not like.
If you are going down the Notice route outlined above, and you meet the criteria, your landlord has no option but to grant you a new lease. If you go down the informal process of negotiation, you cannot apply to the Tribunal to force your landlord to extend your lease or agree to your terms.
If the informal discussions with your landlord fail, and you still want to extend your lease, you will have to start the formal process of serving a notice, so you will have wasted some time and possibly some costs.
What costs do I have to pay?
You will be responsible for not only your own legal fees and expenses but also and your landlord’s reasonable costs. The landlord’s costs include legal costs such as for drawing up the new lease and checking your right to extend your lease, as well as the valuation costs.
This will include the landlord’s valuation for engaging a surveyor to review the papers (such as the lease and the notice) and put forward a valuation for the lease extension.
One of the expenses you are likely to incur is instructing a surveyor of your own to advise you on what to offer for the lease extension, and how to reply to any counter offer that the landlord puts forward. There is no point in spending time and money in fighting the landlord over the premium, if his figures are correct.
In addition, you will have to pay stamp duty if the lease extension price is over a certain amount, which is currently set at £125,000.
What if I can’t afford to wait until I’ve owned the property for 2 years?
Often when we are advising a seller of a short residential lease, we recommend that they do the extension first, to increase the value of the property. Not only will it be worth more money, but it will be easier to sell, because many mortgage companies are not willing to lend against short leases which will put some buyers off. However, sometimes it happens that a seller cannot afford to pay for the extension.
This can often lead to difficulties for a purchaser who perhaps cannot raise a mortgage on a short lease, but there can be ways around this.
For example, the seller can serve the notice before we exchange contracts, with the negotiations for the lease extension being undertaken by the purchaser, who will pay the legal fees and any agreed premium for the extension.
Provided the landlord is willing to cooperate, and Tribunal proceeds are not necessary, the lease extension can be dealt with as part of the purchase so there is no need to wait the two years. This is a fairly common route followed by many sellers when selling the property through Auction.
There is obviously a lot more involved in extending a residential lease, but hopefully this guide will have given you a good idea of the important details. If you need to know more, please contact Express Conveyancing for a free advice on what your options are and we’d be delighted to help you further.
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.