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Informal lease extensions – what you need to know

Leasehold owners wishing to extend the lease on their residential property have statutory rights under the Leasehold Reform and Urban Development Act 1993. The procedure involves serving a Section 42 Notice with the help of a specialist solicitor, while a surveyor will establish the basis for valuation and negotiation of the premium to be paid. It’s a lengthy, formal process leading to the ultimate outcome of a 90-year extension of your current lease and no more ground rent.

However, unless you have owned the property for at least 2 years, the lease has at least 21 years left to run, and your landlord isn’t a charitable housing trust, you will not be eligible to take this route. What’s more, there could be other reasons why a statutory lease extension may not be the right solution for you.

The alternative route is often referred to as an informal lease extension. In a nutshell, the freeholder is contacted direct with an offer which can lead to a period of negotiation before a legally binding agreement is reached. The main benefit of approaching your freeholder outside of the Act is that is often a much quicker process (the statutory process can take up to a year) involving lower professional fees.

However, without the legal protection of the Leasehold Reform Act in place, the informal route needs to be negotiated with great care. Nightmare stories abound of leaseholders voluntarily agreeing to new lease terms that look innocent enough on the surface but that can end up costing them thousands in the longer term and seriously impact the saleability of their property.

This is not to say that an informal lease extension should be avoided at all costs. But if you do choose this option, it is highly recommended that you take professional advice from an experienced leasehold valuation surveyor and specialist conveyancing solicitor to check that your interests are being served at every step of the process, and revert to the statutory route if all else fails.

  1. Find your freeholder

Identifying the freeholder of your property should be your first step. This information is contained in your lease and can also be downloaded from title register held at the Land Registry. You may also have letters or receipts of ground rent or service charges paid to your freeholder.

This is more than just a fact find. It will materially inform your surveyor’s advice on how to approach your lease extension, depending on whether the landlord is a small private landlord, medium sized investor or large professional property company. It is quite possible that if the latter is the case, or if the surveyor is familiar with the landlord’s operating practices, he may dissuade you from going down the informal route.

  1. Obtain a robust leasehold valuation

Get a clear idea of what your property is worth, and what the likely cost of a lease extension should be, before you enter into any communications with your landlord. Here’s a handy online calculator to help you gain a first insight of the figures involved.

Your surveyor will provide an accurate leasehold valuation and the likely premium payable, including upper and lower ranges, that you can use for the basis of any negotiations on extending the lease on your property.

  1. Contact your freeholder

Having done your homework, it is now time to put together a ‘reasonable’ offer with the help of your surveyor that can be proposed to the freeholder. Make your offer in writing – either directly or via your surveyor who can also be instructed to deal with any subsequent informal negotiations on your behalf.

Your written offer should point out that the price proposed has been arrived at fairly and professionally and that it is based on the minimum of negotiation time to arrive at an agreement quickly and conveniently for all concerned. You should also mention that you reserve the right to serve a formal Section 42 Notice on the landlord if the informal negotiations prove too time consuming or costly.

  1. Consider your landlord’s response

Having approached the landlord with your lease extension offer, he can either reject your proposal out of hand or, more likely, reply with a counter offer. You can expect this to be for a shorter term than desirable (e.g. restoring the lease back up to 99 or 125 years), to include ongoing ground rent (e.g. £250 per year, doubling every 10 or 25 years) and for an excessive premium. You may also be presented with an upfront bill to cover the freeholder’s legal and surveyor’s costs.

It is now up to the expertise of your chosen surveyor to negotiate the premium proposed in the counter offer down to a level that you are prepared to accept and on terms that you are happy to agree on.

It is essential that you brief your surveyor in fully into your objectives for a lease extension. Are you holding out for the full 90-year lease extension and no ground rent that you would be entitled to under statutory provisions? Or would you be amenable to a compromise of a shorter term and some ground rent but at a lower premium?

  1. Make the right decision

At the end of the day, it is up to you to decide whether or not any deal on the table is acceptable to you. Having expended time, money and energy into the process, it would be unfortunate not to end up with a positive outcome, so there’s a great deal of motivation to reach an agreement with the landlord. Your file will then be handed over to your solicitor to finalise the content of the new lease and register the title with the Land Registry.

However, if no agreement can be concluded because the informal offer on the table and the terms proposed are simply too unattractive and the landlord shows no willingness to be accommodating, your surveyor should advise you to step away and to serve Notice instead.

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