What is a Lease Extension?

Dec 17, 2019

What is a lease extension?

A lease extension is the method by which a leaseholder extends the term of their lease. Leases of both flats and houses exist and are capable of extension.

Can I extend my lease?

Provided certain criteria are met you could benefit from the right to extend the lease of your flat or house under legislation. A lease extension carried out in this manner is referred to as a statutory lease extension.

Even if you do not qualify for a statutory lease extension, you may be able to negotiate with your landlord on an informal basis to agree terms for a lease extension.

Why should I extend my lease?

A lease is a depreciating asset. As the term of the lease decreases its value decreases and the cost of extending the term becomes more expensive.

It can sometimes be difficult to sell a property with a short lease because a mortgage provider may be reluctant to lend money against the short lease term.

If you are claiming a lease extension in accordance with the statutory procedure, then you will benefit from your ground rent being reduced to a peppercorn (nil).

A lease extension is also often seen as opportunity to modernise outdated terms contained in some older leases.

When should I extend my lease?

There is no one answer, but we would advise that you extend your lease in advance of the term dropping below 80 years unexpired. If a lease term is below 80 years the cost of extending the lease increases as an additional ‘Marriage Value’ forms part of the calculation of the premium. Please see below ‘What is Marriage Value?’

Generally most people would look to extend their lease when the unexpired term is between 80 and 90 years. This may be because they are looking to sell the property in the future and want to safeguard against the lease becoming unmortgageable, or they may be looking to benefit from a lower premium by extending the lease before the term decreases any further.

Please note this applies to leases of flats only, as a lease extension of a house does not attract a premium.

How long does it take to extend your lease?

The time taken to extend a lease depends on a number of variables including the number of parties involved and agreement on the premium and specific terms.

A statutory lease extension is dictated by a timetable that must be adhered to and matters generally take a number of months between serving of notice for claim of a lease extension and completion of the matter.

Lease extensions outside of the statutory procedure tend to proceed more quickly in light of the fact that the premium and any revised lease terms will have been agreed at the outset usually.

How much does it cost to extend your lease?

There are a number of online tools and calculators which can assist you with estimating the cost of your lease extension and we would refer you to the calculator on the LEASE website https://www.lease-advice.org/calculator/ please bear in mind this provide you with an estimate only.

To obtain an accurate indication you will need to instruct a specialist valuer with expertise in leasehold valuation, and this is usually the starting point for a statutory lease extension.

If you are negotiating a premium directly with your landlord then there is no rule of thumb, but the premium will usually be by reference to the cost of lease extensions carried out on other properties within the same development, or other similar properties with same existing lease terms.

We would in all cases suggest that you speak to a leasehold valuer to ensure that any premium put forward by your landlord directly is at least as ‘good a deal’ as that which you would likely obtain following the statutory procedure’.

What is Marriage Value?

Marriage Value is incorporated into the calculation for the premium for a statutory lease extension when the existing unexpired term is below 80 years.

Broadly speaking, the combined value of the leasehold interest and freehold interest in a property before a lease extension has been carried out is deducted from the combined theoretical values in a property after a lease extension has been carried out. This increase in value is then halved and added to the calculation.

For example:

Leasehold interest + Freehold interest = £250,000 before the lease extension.

Leasehold interest + Freehold interest = £280,000 after the lease extension.

£280,000 – £250,000 = £30,000.

£30,000 / 2 = £15,000

Marriage Value = £15,000

The above is intended as a brief guide to lease extensions, and should not be relied upon as specific legal advice. If you require advice regarding Lease Extensions or any other Real Estate matter, please contact Joshua Watkins in our Real Estate department. You can also email your query to Joshua.Watkins@herrington-carmichael.com, call 01276 686222 or visit https://www.herrington-carmichael.com/.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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