Lease Extension

What is a lease extension?

A lease extension is a contract between parties (usually just the freeholder and the leaseholder) that adds a continuation period to a long-lease and replaces the current lease with a new one. The contract sets out the dates on which the lease extension begins and ends along with any new terms.

What are the benefits of extending a lease?

A lease extension will increase a property’s market value. As a lease depreciates the closer it is to the end of the term, extending the lease protects the value of it. A relatively long term left on the lease (over 60 years) is usually required to sell a leasehold property, most financial institutions will not give a mortgage to potential buyers without this and a property with a longer lease is inevitably more attractive to prospective purchasers. A lease extension may also provide an opportunity for the leaseholder to negotiate possible changes in the terms of the lease.

When should a leaseholder consider a lease extension?

Ideally a lease should be extended before the term of the lease reaches 80 years. The fewer years left to run on the lease the more the lease extension will cost and when the term remaining is less than 80 years the freeholder is entitled to add half of the ‘marriage value’ to the calculation of the price, thus substantially increasing the cost of the extension (Marriage value is the additional value of the leasehold and freehold interests combined).

What costs are involved in a lease extension?

If a leaseholder is considering a lease extension they should first obtain advice from a qualified valuer. This will provide an indication of how much the lease extension will cost. The valuer will be able to estimate the highest and lowest figure the leaseholder should expect to pay. There is rarely an agreed fixed price for a lease extension, unless this can be achieved through negotiation in which case the leaseholder would still need to be aware of the estimated price range. A lease extension calculator is available on the LEASE website which may help give a rough idea of the lease extension cost:

In addition to the cost of the lease extension the leaseholder will need to pay their own legal fees as well as the freeholder’s reasonable costs for employing solicitors and other professionals. This would not include any administrative or legal costs in relation to cases referred to an FTT.

If the leaseholder does not have a sufficient amount available in capital they will need to consider where the finance for a lease extension might be obtained. The leaseholder may have to approach financial institutions to find out whether they might qualify for a mortgage or loan to finance either all or part of the cost of the lease extension.

It should be noted that if a leaseholder withdraws from the lease extension process at any time after the Tenants’ Notice is served they will be liable to pay their own, and the landlord's reasonable costs. As this could be a significant amount the leaseholder should ensure they would be able to finance the lease extension and other costs before they proceed.

What is the legal right to lease extension?

The Leasehold Reform Housing and Urban Development Act (LRHUDA) 1993 gives most leaseholders the right to have a new lease for a term of 90 years, which is granted in addition to the number of years they have left on their existing lease. The landlord can only charge a peppercorn rent, which means there will be no significant ground rent for the entire term.

What is the eligibility for the legal right to lease extension?

To qualify for the legal right to a lease extension the leaseholder must have held the leasehold interest in the property for at least two years; and have

a lease that was originally granted for a term of more than 21 years; (it does not matter how long is left to run on the lease); or
a lease of 21 years or less that includes a clause allowing a perpetual right of renewal;
a shared ownership lease where the leaseholder’s share is 100%; or
a lease that has expired where the flat-owner has become a tenant and the landlord had not served a notice to try to bring the tenancy to an end.

However, even if the leaseholder satisfies the above criteria, they will not be a qualifying tenant if either of the following applies:

the landlord is a charitable housing trust and the property is provided as part of the charity's functions;
the leaseholder holds a business or commercial leasehold interest.

Leaseholders of some types of properties are completely excluded from a legal right to lease extension, which are:

National Trust properties;
buildings that are within a cathedral precinct;
Crown properties (although the Crown is not bound by the relevant legislation, the Minister has made a statement to the House of Commons that the Crown will be prepared to comply with its principles so lease extension should be possible).

In most cases the immediate landlord will be the freeholder, and therefore they will be the appropriate party for the leaseholder to serve the Tenants’ Notice on. There will be some circumstances where the immediate landlord has a sub-lease, which does not have enough years left to run to allow the flat-owner a 90-year extension.

This should not prevent the lease extension, but the leaseholder will need to find out the identity of the ‘competent landlord’ as they will be the party with the authority to deal with the application for lease extension.

What is the eligibility for the legal right to lease extension?

In order to be a qualifying leaseholder for the legal right to lease extension the leaseholder must have held the leasehold interest in the property for at least two years.

Can a lease extension take place during enfranchisement?

A lease renewal can take place at any time during the term of a long-lease, but if an application for a lease extension is made, it will be put on hold if some or all of the other leaseholders are in the process of trying to collectively buy the freehold (known as enfranchisement) until this is completed. It should be noted that following a successful enfranchisement process all leaseholders can be granted leases for a long period which would make an application for lease extension unnecessary.

What initial steps does the leaseholder need to take?

The formal procedure begins with the service of the Tenant's Notice on the landlord and it then follows a process set out in the legislation. Prior to serving this Notice it is advisable for the leaseholder to spend some time ensuring they have all of the information and knowledge to complete the process, by carrying out the following:

Checking eligibility.
Choosing and employing professional advisers.
Obtaining an estimate of how much the lease extension will cost.
Ensuring that sufficient funds will be available.
Gathering the information.
Having the Tenant’s Notice prepared.

Although it would be the usual practice, the above need not be followed strictly in order and in most cases several of the above will take place at the same time.

What professional assistance is needed?

Leaseholders should be aware that surveyors and particularly solicitors specialise in certain subjects so it is important to select those who can demonstrate they have extensive knowledge of the lease extension legislation, practices and procedures.

At some stage prior to the service of the Tenants’ Notice and to help on an ongoing basis, The LA would strongly advise the leaseholder to employ a solicitor as well as a valuer. In addition to the advice they can provide, there are a number of actions throughout the lease extension process they can help with which include:

Preparing documents that are required for the lease extension application.
Drafting and serving the Tenants’ Notice on the competent landlord and sending copies to any other parties with an interest in the freehold.
Responding to the landlord if they request information.
Negotiating any new terms and dealing with the conveyancing of the new lease.

The valuer should be able to help with the following:

Providing an estimate of the highest and lowest valuation of the lease extension that might be achieved, to give the leaseholder an indication of the possible outcome of any negotiations.
Estimating the price that should be included in the Tenants’ Notice.
Responding to the counter-notice the competent landlord serves.
Negotiating and reaching a settlement on the cost of the lease extension and any fees.
Representation at the First-tier Tribunal (FTT), if necessary.

The need to employ a solicitor and valuer will apply regardless of whether the landlord agrees to the lease extension or if the leaseholder has to exercise their legal right.

What information is required?

The leaseholder or their professional representative will need to gather all of the necessary information to ensure the Tenants’ Notice is correct and valid before being served on the landlord. They may also need to respond to possible challenges from the competent landlord following the service of the Tenants’ Notice. The following information will be needed:

the identity of the competent landlord;
details of any intervening or head-leases and details of the relevant leaseholders; and
a copy of the existing lease and the registered title.

The competent landlord is the one with the appropriate interest in the property, as only they will have the authority to grant the 90-year lease extension or negotiate a different term. In most cases this will probably be the immediate landlord if they are the freeholder or a head-lessee with a lease, which has enough years remaining.

However, in some cases the immediate landlord may be a head-lessee with a lease only a few days, months or years longer than the one held by the flat-owner seeking the extension and in these circumstances it will be necessary to identify the landlord with sufficient interest to grant the new 90-year lease. In addition to identifying the competent landlord, the leaseholder will need to find out the details of any intermediate landlords and the length of the lease they hold.

The leaseholder might already be aware of some of the above information. Other necessary information can be obtained from rights to information under Landlord and Tenant legislation, the service of Information Notices under other housing legislation or from Land Registry records. The professional adviser should be able to provide further details of these rights, which are also available from the LA on request.

What happens if the landlord cannot be found?

If, the landlord cannot be found or contacted, after the leaseholder has made reasonable efforts, this should not prevent a lease extension. This issue can be resolved in these ways:

If the landlord is in receivership or made bankrupt, the Initial Notice may be served on the receiver or the ‘trustee in bankruptcy’. As either the receiver or the trustee would have the status of landlord at that time they would need to comply with the legislation and deal with the application for lease extension.
The Tenants' Notice cannot be served. In circumstances where the landlord cannot be found and the Initial Notice cannot be served the leaseholder may make an application to the county court for a Vesting Order. If the court determines that the leaseholder has the right to a new lease then it will allow the leaseholder the lease extension in the landlord's absence. The case would then be referred the case to the FTT for a determination of the cost of the lease extension.

What is in the Tenants’ Notice and how is it served?

Serving the Tenants’ Notice is the first formal stage for a leaseholder trying to exercise their legal right to a lease extension. The leaseholder will be liable for the freeholders’ reasonable costs from the date the freeholder receives the Tenants’ Notice whether they complete the lease extension process or not. It is essential that the Notice is accurate and complete as, although any errors can be corrected by application to the county court, it is an unnecessary expense the leaseholder will wish to avoid.

The Tenant's Notice must include all of the following information:

the full name of the leaseholder and the address of the flat;
the name and address of the leaseholder’s representative if any;
adequate information about the flat to identify the property to which the application for lease extension relates;
details of the lease including its date of commencement and a summary of its terms;
the price that is being proposed for the lease extension;
the terms the leaseholder proposes for the new lease; (if it is intended that it will be significantly different from the existing lease); and
a date by which the landlord must respond to the Counter-Notice, which must be not less than two months from the date on which the Tenant's Notice is served

It should be noted that some protection for the leaseholder is provided by the right to register the Initial Notice with the Land Registry. This will protect the leaseholder against the landlord's sale of the freehold since any purchaser of the freehold will have to deal with the lease extension and the process will continue as though the new landlord had originally received the Tenant's Notice.

The service of the Tenant's Notice also fixes the ‘valuation date’ as the same date as the Notice. The valuation date is when the variable factors affecting the price are set. These would include the remaining number of years left on the lease, the value of the flat at that time and its estimated future value. Therefore, no matter how long the negotiation or determination of the price takes, it will always be based upon the factors applying on the date of service of the Tenant's Notice. The LA would strongly advise leaseholders applying for lease extension to employ a solicitor for the preparation, drafting and service of the Tenants’ Notice.

Once the Tenants’ Notice has been served, the process of lease extension has started. The leaseholder or their professional representative will then be in a position where they are asked for information and required to meet deadlines; any failure to do so may jeopardise the process.

What happens next?

After the Tenants’ Notice has been served the landlord will have a legal right to ask the leaseholder for details of the title to their flat including the length of ownership.

The landlord has 21 days from the Tenants’ Notice being served in which to request the above information. If this information is requested it must be provided within 21 days and therefore any leaseholders applying for lease extension need to ensure their solicitor has all of the necessary information and documents to allow a response within this relatively short period.

It should be noted that if these deadlines are not met the landlord may serve a Default Notice and make an application to the court for an order for compliance. At this stage the landlord has a right to inspect the flat that the lease extension applies to, by giving at least three days’ notice being given to the owner and the occupier.

Does a deposit have to be paid?

The landlord has the right to request a deposit at any time after receipt of the Tenant's Notice. This deposit is limited to 10% of the premium that has been proposed in the Tenant's Notice, or £250, whichever is the greater. The premium quoted in the Notice may not be the price agreed following negotiation or a determination by the FTT, but it will be the figure the landlord uses to calculate the deposit. The premium proposed must be as accurate as possible, as if the flat-owner or their representative includes a very low figure to try to reduce the amount of deposit payable the Tenants’ Notice may be declared invalid.

Can a new owner continue with an application for lease extension?

Once a leaseholder has served a Tenants’ Notice on the landlord they can then sell the flat with the benefit of the application for a lease extension already in place. It will mean that the new flat-owner will be able to proceed with the application, without having to wait for the usual two years’ ownership qualification. This should prove helpful in cases where a lease with only a short time left to run which usually means that a prospective purchaser finds difficulty in obtaining a mortgage.

What is the landlord's Counter-Notice?

The landlord must serve the Counter-Notice by the date in the Tenants’ Notice; this must:

agree to the leaseholder’s right to the lease extension and accept their terms;
agree to the leaseholder’s right to the lease extension but propose alternative terms; or
not agree to the participating leaseholders right to lease extension and set out reasons why (this may then need to be determined by the county court if it cannot be resolved through negotiation); or
neither agree or disagree, but clarify that the lease extension is being refused due to an intention of the landlord to redevelop the whole or a substantial part of the premises. This will only apply in relatively few cases where the remaining period of the lease is less than five years from the date when the Tenants’ Notice was served.

If following the service of the freeholder's Counter-Notice, the freeholder and the flat-owner seeking the lease extension cannot agree on the price, then two months after the Counter-Notice has been served, either party can apply to the FTT for a decision. This application must be made at least two months from, but within six months of, the date the Counter-Notice is served. The decision of the FTT becomes final 21 days after they issue it. Any appeal must be made within this period to the Upper Tribunal, with the permission of the FTT.

The leaseholder may apply to the county court for a Vesting Order If the landlord neglects to serve a Counter-Notice by the date specified in the Initial Notice. This is an Order, which gives the court the authority to grant the lease extension. If the court is satisfied that all of the qualifying criteria for lease extension have been met they will grant the Order on the terms set out in the Tenants’ Notice. This type of application must be made to the court within six months of the date on which the Counter-Notice should have been received.

What will the terms of the new lease be?

The leaseholder will need to be aware of provisions set out in legislation regarding the terms on which the lease relating to the lease extension can be granted:

To be at a peppercorn rent, which means there will be no significant ground rent for the entire term of the lease, which will be 90 years, plus the number of years left to run on the existing lease.
To be on the same terms as the existing lease, subject to relatively minor amendments and statutory exclusions and additions:

Amendments, to make reference to any alterations to the flat, or the communal parts of the building, since the existing lease was drafted or to remedy a defect in the lease under Section 35 of the Landlord and Tenant Act 1987.
Exclusions - since the LRHUDA allows a legal right to perpetual renewal of the lease, any existing clauses relating to restrict renewal or early termination are to be omitted from the new lease.
Additions - a requirement for the leaseholder applying for the lease extension not to grant a sub-lease of sufficient length, which would allow any sub-lessee a legal right to a lease extension.

The landlord's redevelopment right - the new lease must also include a term giving the landlord the right to repossession of the flat in order to redevelopment if they wish. This right would not be effective until the end of the term of the lease prior to extension and it would require a court application and the payment to the leaseholder for the full value of the remaining 90 years of the lease.

Please see the LA information sheet 101 Glossary for a precise explanation of the terms used in this information sheet. This is a complex process and the LA can provide detailed advice to any flat-owner who is contemplating lease extension or at any time after the process has begun. However, the LA will be unable to carry out any of the functions of a solicitor, surveyor or valuer that are mentioned above.

Disclaimer: This is a very general explanation of the subject. Where issues are not governed by statute the information is our opinion or best practice. You are advised to seek professional advice before acting on the guidance contained herein. Whereas The Leaseholder Association endeavours to ensure that published information is correct, it does not warrant its completeness or accuracy. The Leaseholder Association assumes no responsibility or liability for any injury, loss or damage incurred as a result of any use or reliance upon the information and material contained herein.