Let us break down what a leasehold extension is before we go anywhere…
A lease is a binding contract between a freeholder and a leaseholder, which creates interest in a property.
Unlike a freehold property, the interest in a lease is for a set time period, defined as a ‘term’. In exchange for a term, freeholders collect payment, in the form of a mortgage or an outright sum.
When it comes to investments, a lease is known as a ‘diminishing asset’. This means that as time goes on and your lease becomes shorter, the value goes down. Any term less than 80 years is deemed ‘short’.
Mortgage lenders are less likely to lend against short-lease properties. This limits who can afford the property to only cash buyers. If we look at market trends, lenders are typically not dealing with properties below an 80-year term. For this reason, short-lease properties are harder to sell and remortgage.
Because of this, a lot of leaseholders are trying to get a leasehold extension, which adds years back onto their lease. This gives leaseholders security over where they live and preserves or even increases the value of their property.
Due to the setbacks associated with a short-term lease, potential buyers might be turned off from a property. This then affects the value. With a leasehold extension, you can make sure your property remains attractive to future buyers and maintain its marketability and overall value.
Leasehold extensions allow homeowners to feel secure in their property without the threat of the lease expiring. A longer lease means you don’t need to worry about your right to live in your property for an extended period.
In many short-term lease agreements, ground rent will go up over time. With a lease extension, you can negotiate better terms which will help save you money. You can then keep control over your property’s financial obligations.
With a longer lease and more time, you can invest back into your property. Whether it’s your home cosmetics, for energy efficiency, or making significant upgrades, these changes help boost your property’s value.
Mortgage lenders are less likely to offer favourable rates to short leases. This can make remortgaging your home or taking out a loan a serious challenge. By extending your lease, you can increase your borrowing power and access financial options at competitive rates.
If any of the below applies to you, then you could qualify for a leasehold extension.
Even if a property ticks all the boxes above it could still not be eligible for a leasehold extension. Any property in Cathedral boundaries, owned by the Crown or National Trust, or falls under a Shared Ownership property lease does not qualify.
A leasehold extension may not be granted if you are not eligible, or if the landlord is undergoing plans to conduct a remodel or demolition of the property.
Here is a basic overview of the process of obtaining a leasehold extension. It is worth pointing out that not every transaction is straightforward, so you should have an experienced legal team oversee the process.
The Leasehold Reform Act 1993 outlines how much a leaseholder must pay to the freeholder when extending a lease. This payment is referred to as a ‘premium’.
The premium factors in the value freeholders may lose, any relevant compensation they’re owed and their share of the new property value.
There are also solicitor fees and surveyor costs to consider. Leaseholders are also liable for reimbursing the freeholder’s expenses in the process, such as legal fees.
Leaseholders with only one property who negotiate a premium with their freeholder in excess of £125,000 must also pay Stamp Duty Land Tax. Similarly, Stamp Duty Land Tax applies for leaseholders with multiple properties, who settle a premium of over £40,000.
One of the final acts of the previous government was to guarantee that the Bill gained Royal Assent. The Leasehold and Freehold Reform Act 2024 (the New Act) became law on May 24, 2024. However, while it is already law, the provisions have yet to go into effect. The New Act’s commencement date will be set by this government, and it appears that the amendments will not take effect until late 2025 or early 2026.
For the time being, the provisions of the Leasehold Reform Housing and Urban Development Act (1993 Act) and the Leasehold Reform Act 1967 (1967 Act) remain in effect, just as they did before the New Act became law.
The New Act would revise the provisions of the 1993 and 1967 Acts, both making substantive and procedural changes.
Overall, the New Act will significantly strengthen tenants’ statutory enfranchisement rights. The process for filing a claim will also be streamlined.
Unfortunately, the valuation position is still unknown. The value mechanism under the New Act will be set by secondary legislation, and the formulation of this secondary legislation may necessitate more consultation. Marriage value will be abolished, which may result in lower rates. However, it is unclear whether further changes will be made to counteract the drop in premiums earned by abolishing marriage value. For example, some valuers believe that capitalisation rates will be fixed, negating some of the advantages to renters.
It is expected that any consultation on valuation techniques will be contentious. Large individual landlords (such as the important London estates) and institutional landlords (such as pension and investment funds) are seeing a significant drop in the value of their properties and current income. These landlords are likely to exert enormous pressure on the next administration to mitigate the impact of abolition on marriage value through other valuation modifications.
The New Act also fails to address a number of difficulties arising from existing legislation. For example, despite the fact that the 1967 Act’s definition of “house” is widely disputed and has been the subject of much litigation over the years, the New Act makes no changes to it. There will continue to be misunderstanding regarding what defines a “house,” especially in mixed-use properties (for example, if residential units are located above business units). This, along with other gaps and uncertainties in the 1993 and 1967 Acts, will continue to cause uncertainty and litigation.
Many tenants will be in a precarious situation until the New Act takes effect, and they will have to choose whether to pursue their claim now or later under the new laws. Professional legal and appraisal counsel will be essential for individuals who are unclear of what to do.
When the New Act takes effect, those who may postpone their planned claims might want to do so in order to file a claim to buy the freehold of their property or to extend the lease. The New Act will undoubtedly simplify the process, but tenants should be aware that lower premiums do not always translate into lower costs.
For tenants with relatively limited remaining lease terms, the choice could be more difficult. Renters whose remaining lease lengths are barely over 80 years (the marriage value threshold) might also want to give careful thought to their situation.
At Blacks Legal, our experienced residential property solicitors are readily on hand to overlook your leasehold extension with ease.
If you are looking to start the process today or have any questions, then please get in touch via our website, or give us a call on 020 3835 3802.