A Guide to Lease Extensions: What You Need to Know

If you own a leasehold property, you may come across the need for a lease extension at some point during your ownership. A lease extension is the process of extending the term of your lease agreement beyond its original expiration date. It can be a complex and sometimes confusing process, but understanding the basics can help you navigate it more effectively. In this blog post, we will explore the key aspects of lease extensions, including why you might need one, how to go about obtaining one, and what costs and legal considerations to be aware of.

Why might you need a lease extension?

Leasehold properties are typically subject to a lease agreement that specifies the duration of the lease, often for a term of 99 or 125 years. As the lease gets closer to its expiration date, the value of the property may decrease, and it may become more difficult to obtain financing or sell the property. Therefore, lease extensions are commonly sought to protect the value and marketability of leasehold properties.

Lease extensions can be particularly relevant for owners of flats or apartments, as they are more commonly held on a leasehold basis. However, lease extensions may also be applicable to other types of leasehold properties, such as houses or commercial premises, depending on the terms of the lease.

How do you obtain a lease extension?

The process of obtaining a lease extension can be complex and may require legal and valuation expertise. Here are the general steps involved:

1.       Check eligibility: In order to be eligible for a lease extension, you generally need to have owned the property for at least two years, although there are some exceptions. Additionally, you should ensure that you consider a lease extension before remaining term of the lease is below 80 years, as lease extensions become more expensive after this point due to a concept called "marriage value".

2.       Determine the lease extension price: The price of a lease extension typically includes two components: the "premium" and the "ground rent." The premium is the amount you pay to extend the lease, and it is usually calculated based on the current market value of the property, the remaining term of the lease, and the ground rent. The ground rent is the annual rent paid to the landlord, and it may be subject to negotiation.

3.       Serve a Section 42 Notice: To formally initiate the lease extension process, you need to serve a legal notice called a Section 42 Notice on your landlord. This notice should be prepared by a solicitor or a specialist lease extension valuer, and it sets out your intention to extend the lease and the proposed terms, including the price. The landlord then has a specified period of time to respond.

4.       Negotiate and complete the lease extension: Once the landlord responds to the Section 42 Notice, negotiations may take place to agree on the terms of the lease extension, including the price. If an agreement is reached, the terms are documented in a legally binding document called a lease extension deed. Once the lease extension deed is completed, it should be registered with the Land Registry to formalize the extension.

What costs and legal considerations should you be aware of?

Lease extensions can involve various costs and legal considerations that you should be aware of. These may include:

1.       Premium: The premium for the lease extension can vary depending on various factors, such as the current market value of the property, the remaining term of the lease, and the ground rent. It is important to obtain a professional valuation to ensure that the premium is fair and reasonable.

2.       Legal fees: The process of obtaining a lease extension typically involves legal work, including serving a Section 42 Notice, negotiating the terms of the lease extension, and preparing the lease extension deed. Legal fees can vary depending on the complexity of the lease and the negotiations involved

It may be possible for you to proceed without the need of a Section 42 Notice by way of an agreed or voluntary lease extension if your Landlord agrees.  This is often a cheaper in terms of legal fees and quicker than a statutory lease extension however you have less control over the premium being offered by the Landlord in this instance.

For more advice or to instruct Biscoes on a lease extension, please contact one of our offices who will be able to take your instruction.