Extending a lease through a leasehold extension allows leaseholders to extend their lease by 50 years if they are a homeowner and 90 years if they are a flat owner. The benefits of extending a lease include increased property value, avoiding leasehold disputes, avoiding escalating costs, the ability to make improvements to a property, an easier remortgage and sale process and the ability to negotiate changes to the lease terms. If your lease term is less than 80 years it is important to extend your lease.
This is a comprehensive guide for leaseholders looking to extend their leasehold, addressing leasehold property law. The content will cover the lease extension rights, the process of extending a lease and seeking a leasehold valuation, and the benefits and costs involved.
We’ve written this for:
Leaseholders nearing the end of their lease term
Property owners wanting to extend their lease to increase property value
Legal professionals advising clients on lease extensions
Property investors dealing with leasehold properties
After reading, you’ll understand the legal rights of leaseholders, the steps involved in extending a lease, and the potential costs and benefits of doing so.
By the end of this guide, you’ll be clear on the benefits of seeking legal expertise from our property law experts to navigate the complexities of the lease extension process.
Legal rights for extending a leasehold
To extend your leasehold you need to be eligible for a lease extension.
The eligibility criteria for a lease extension include:
The property must be a residential leasehold
You must have owned the property for at least two years
The original lease must have been granted for at least 21 years
The property cannot be a shared ownership property or on a National Trust lease
Statutory lease extensions can be made under the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Urban Development Act 1993.
Under the 1993 act there is a strict procedure for deadlines for lease extensions. Statutory lease extensions allow for an additional 90 years to be added to the term of your lease. Typically ground rent is reduced to zero when leaseholders extend their lease.
Legal process for extending a leasehold
There is a set legal process for extending a leasehold that must be followed by leaseholders. Below we outline the step-by-step process for extending a leasehold.
Step 1: Initial valuation
When looking to extend a leasehold it is essential to obtain a professional valuation of the lease extension cost. This is important to ensure you get a fair price from the freeholder. A valuer can also negotiate with the freeholder on your behalf. You may also have to pay your freeholder’s valuation costs and ‘reasonable fees’. A solicitor can review and challenge these to ensure they actually are reasonable.
A lease extension is calculated on the following basis akin to an investment basis. Essentially, the rate is calculated on the current value of the future income of the property.
So, in a valuation for a lease extension, the reduction in the landlord’s interest due to extending the lease at a nominal value is calculated.
This is the amount of ground rent a landlord would have received for the remaining period of the lease, and the 90 years they have to wait until the ownership of the lease would theoretically return to them.
Step 2: Serving the Section 42 Notice
A Section 42 Notice is used to start the process of a leaseholder requesting to their landlord to extend their lease on a property.
You will require the services of a surveyor to value the cost of the lease extension for you and a solicitor to draft the notice. It is advisable to secure the guidance of a solicitor to serve a notice on your freeholder to avoid wasted time and costs. It can be a complex notice to draft, and only small errors can cause a notice to be invalid.
The notice should be served to the competent landlord and also any party involved in the lease, including management companies.
Serving the notice to the competent landlord is where things can get convoluted. The competent landlord is not always the freeholder. In some cases, the freeholder grants a long lease to an intermediary leaseholder who then grants a sublease to the tenant. Yet, if the lease has fewer than 90 years remaining the intermediary leaseholder would not be classified as competent. If you have an intermediary leaseholder, it is important to check that their lease term has at least 90 years remaining.
Moving away from those edge cases, typically, a surveyor carries out a valuation of your lease and then sends a copy to your solicitors.
Section 42 notices should include:
The leaseholder(s) full name(s)
The address of the leasehold property
Details of the lease, including when it was granted
The proposed premium your valuer suggests paying to extend the leasehold
Number of years increase
Proposed changes to the ground rent – typically it is eliminated or becomes nominal
Provide a deadline for freeholder response, no less than 2 months from the date of the notice
A solicitor can then serve the Section 42 Notice on your freeholder stating the premium you would be prepared to pay to extend your lease.
If a notice is invalid and needs to be withdrawn, you must wait 12 months before you can serve another.
Step 3: Negotiating the terms
When a notice has been served, the freeholder usually has 2 months to respond to it, or the specific deadline set within.
The freeholder responds with what is known as a counter notice, this is a Section 45 Notice. In this notice, the freeholder will confirm or deny the claim for a lease extension, state the amount they require for a lease extension to go ahead and suggest any new terms or amendments to the lease’s terms and conditions that they wish to make.
The serving of a Section 45 notice – when the freeholder indicates an openness to grant a lease extension – marks the beginning of negotiations.
The negotiation process will involve a back-and-forth process between your valuer and the freeholder’s valuer.
When preparing a Section 42 notice, an experienced valuation surveyor will provide a best-case and worst-case scenario figure, this is essentially the valuation perspective from your valuer, based on local knowledge, and your freeholder’s perspective. This way counterclaims can be anticipated.
When there is no counter-notice served to your Section 42 Notice, and you’re eligible for a lease extension, a freeholder may be bound by the premium you state you are willing to pay.
If both sides cannot agree on a valuation the matter may be referred to a First-Tier Tribunal where a decision will be made by a combination of a chairman, a lawyer or surveyor and someone without knowledge of property law.
Step 4: Completing the lease extension
There are a few final steps to complete a lease extension. A lease extension agreement should be drafted.
Firstly, the original lease should be consulted.
The following is usually covered:
Parties - the names of all the parties, including the freeholder
Extension term - the start and end date of the extension
Rent – changes to the rent date, amount, or payment method
Security deposit – whether a security deposit will change
Previous terms – a statement that the previous terms and conditions remain unless otherwise stated
Signatures – the tenant and landlord/freeholder must sign
Jurisdiction – the governing law that shapes the agreement
Notices – addressing how notices will be delivered
Termination – conditions required for either party to terminate the agreement before the end date, and the notice period required
Renewal – conditions under renewal and extensions can occur
Both sides sign the agreement when the terms have been agreed upon and submit it to the Land Registry to register the title.