Extending your lease can reap many benefits, however, the process is by no means straightforward. In this blog, we’ll cover what a lease extension is, what a leasehold is, the benefits of extending your lease and the qualifying criteria to do so.

But first things first, what is a lease extension? A lease extension is a legal agreement between the freeholder and leaseholder that usually extends the lease term by 90 years and reduces the ground rent to a ‘peppercorn’.

To understand lease extensions you must first understand leaseholds, as the basis on which lease extensions are created.

What is a Leasehold?

A leasehold is a form of contract through which the lease for a property is purchased from a freeholder for the right to live in it for a set number of years. In this kind of agreement, the freeholder (or landlord) continues to own the property and the ground it sits on, as well as communal areas like foundations, roofs and stair landings, and the maintenance responsibility for the building. This type of ownership is common in apartments and flats that sit within larger buildings, where ownership rights would clash if separate properties were to be owned as freehold.

Why Should You Obtain a Lease Extension?

As a diminishing asset, a lease's value decreases as the lease term shortens. For that reason, leaseholders need to be aware of the remaining length of their lease. Generally, any lease under 80 years is considered short, and comes with two major downfalls for the leaseholder:

  • The property becomes harder to sell and less likely to qualify for a mortgage
  • The cost of extending the lease becomes higher and sometimes drastically increases as the lease runs down

Because of these drawbacks, under the Leasehold Reform, Housing & Urban Development Act of 1993, leaseholders were given the right to extend their lease once they have owned it for two years, and groups of leaseholders were given the right to buy out their freehold under collective enfranchisement.

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What is a Lease Extension?

A statutory lease extension is a legal agreement between the freeholder and leaseholder that extends the lease term by 90 years in addition to the remaining term, reducing the ground rent to a ‘peppercorn’, or virtually zero.

What Are the Benefits of Extending a Lease?

There are a number of benefits involved in obtaining a lease extension for your property:

Securing the Investment

Extending your lease under the 1993 act entitles you to 90 years in addition to the remaining term at no ground rent. This means that if the present lease had 80 years left, the new leasehold would be for 170 years. This extension secures the investment in the property for a lifetime, meaning that owners can have peace of mind that their asset is no longer a diminishing one.

Preserving Value

A 90- year lease extension ensures that the property can be sold for full market value even after being owned by the leaseholder for a whole generation.

An Opportunity to Renegotiate

While the new lease should be on the same terms as the existing lease, a lease extension provides an opportunity to renegotiate lease terms or update the terms of the lease in accordance with any updates to the law.

Does a Lease Extension Add Value to Your Property?

Yes, extending your lease will increase your property’s market value, as it eliminates the factors that negatively impact your property’s value on a shorter leasehold:

  • The costs of renewing your lease exponentially increase as the term of the leasehold decreases, which may put off potential buyers
  • Shorter leases make obtaining mortgages more difficult, limiting your buyers' market
  • Shorter leaseholds have higher ground rent costs, which are effectively reduced to zero when a lease extension is obtained
  • If your leasehold term falls under 80 years, your freeholder becomes entitled to 50% of the value that the extension adds to the property - known as marriage value
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When Should You Extend Your Lease?

As a minimum, your lease should be extended before it reaches 80 years - after which point the freeholder is entitled to 50% of the marriage value. As a rule of thumb, the fewer years remaining on the lease, the bigger the cost of the lease extension will be. Ideally, if your lease is anywhere near approaching 85 years, you should start making enquiries into extending your leasehold.

Who Qualifies for a Lease Extension?

Checking that you are an eligible leaseholder is the first step in the lease-extension process. The 1993 act gives most leaseholders the right to extend their lease term as long as they meet the following qualifications:

  • The lease must have been originally granted for a term of more than 21 years, or the lease included a clause allowing a perpetual right of renewal
  • The leaseholder must have owned the lease for at least two years

However, some exceptions apply, even if the leaseholder qualifies, in the following circumstances:

  • The landlord is a charitable housing trust
  • The lease is of a business or commercial nature
  • The property belongs to the National Trust, The Crown, or a cathedral’s precinct

How Much Does a Lease Extension Cost?

The cost of your lease extension will be made up by the premium and the leaseholder’s and freeholder’s reasonable professional costs.

We recommend that any leaseholder considering a lease extension seeks the advice of a professional valuer, who will be able to provide an estimated range within which the premium price is likely to settle. It is crucial that the leaseholder ensures that they will be able to finance the costs of the lease extensions before beginning the process as, once the Tenant’s Notice is served, they will be liable for any reasonable legal costs, even if they choose to withdraw from the process.

The Premium

A premium is the price to which the landlord of the freehold is entitled to extend the leasehold. The basis for this figure is set out by the lease extension formula established in the Leasehold Reform Housing and Urban Development Act 1993, which takes into consideration the landlord’s present and future loss in value, based on the figures of the local property market.

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While there are tools that can give you a rough estimate of what your premium might be, the final figure will come down to a negotiation with the freeholder and should be backed by the advice provided by a competent valuation surveyor.

Professional Costs and Fees

The leaseholder is liable for both their own professional fees and their landlord’s ‘reasonable’ professional costs, which include legal fees and valuation survey costs.

What are the Initial Steps to Obtaining a Lease Extension?

If you are looking to extend your lease, you will need to begin the formal procedure by servicing a Tenant’s Notice to your landlord. However, before doing so, it is highly recommended that you have all the knowledge, information, and finances needed to complete the process. This includes:

  • Checking eligibility
  • Seeking the advice of professionals to support you and your best interests throughout the process
  • Obtaining an estimate of the costs
  • Ensuring that they have sufficient available funds
  • Gathering the correct information and legal documents
  • Prepare the Tenant’s Notice

How Aston James Associates Can Help You Navigate The Lease Extension Process

Aston James Associates are a privately owned Independent Chartered Property Surveyor practice based in South East London. Our qualifications, decades of experience, and expert knowledge of the local area come together to provide you with reliable lease extension and enfranchisement services that will help you navigate the lease extension process with ease.

Call us today to find out more about how we can help, or use or use our contact form to request a no-obligation quote for your lease extension valuation.