It has become widely accepted that leases become ‘short’ at around 80 years. It is advisable to extend any lease that falls below this length.

As the term diminishes the cost of extending does rise steadily year on year accelerating as the lease approaches say 75 – 70 years. If you are able to extend close to the 80 year mark then you are much more likely to find the costs manageable.

If you have a short lease which you may wish to sell (or bequeath) in the future then extending is something of an unfortunate inevitability. You will need to extend to protect the capital value of your investment.

The length of your lease will affect the saleability of your property for two reasons:

1. Potential buyers will have difficulty obtaining finance if the lease is not long enough.
   
2. The cost of extending the lease can deter your buyers.
   

Once a lease diminishes to around 65 – 60 years the property becomes un-mortgageable; you will be very unlikely to find cash buyers for short leases and almost certainly none prepared to pay a market (long lease) price for the property.

In practical terms this means that prudent buyers, under the advice of their solicitors, will expect any lease under 80 years to be extended before purchase (to avoid future costs).

Note: Flat buyers rarely want to take on the inconvenience and cost of extending themselves so as an owner it is better to extend yourself at the earliest opportunity. It is, nonetheless, possible to assign your right to a lease extension over to a new buyer and pass the costs on in exchange for a discount on the selling price. This method is not the best solution but it can solve the issue of raising finance (see below for more details).

A number of factors including the lease length and the market value of the property will affect the price payable. Lease extensions can range from £2,000 to £20,000 or more but there is no rule of thumb within leasehold valuation. A professional survey and full valuation are required in each case to establish the likely price.

It should be remembered firstly that the longer you leave the situation the more expensive it will become and that all of your expenditure will be recovered in the increase in value of your flat.

The first thing you will need is a surveyor’s valuation report.

If you have not been given a price by your freeholder it is advisable to submit a valuation report with your initial offer. In rare cases freeholder will simply accept your surveyor’s opinion and agree your opening offer. This is fairly unusual and there is almost always an element of negotiation.

If you have already had an offer from your freeholder there is no guarantee that the offer is an acceptable one and it is advisable to have it independently verified by your own surveyor. Your freeholder’s valuation may be over-inflated and the terms of the lease extension may not be satisfactory (for example freeholder’s often wish to raise ground rents without making adequate concessions).

After you have received your valuation report and made your offer we can advise you how best to negotiate the matter. We will always attempt to settle the matter through informal agreement, directly with your freeholder, or with their surveyor. If your freeholder will not agree to a reasonable level, you can serve a section 42 notice. The section 42 notice represents your formal offer and is the first stage of the legal process for extending your lease. Once a notice is served both sides must adhere to a strict timetable and to rules concerning costs. Austin Gray can recommend a specialist solicitor for any necessary legal services (unless you wish to use your own).

Your freeholder is entitled to have the lease extension formally valued at this point and he will serve a counter notice (including his counter offer, often at a substantially higher level). You are liable for the freeholder’s ’reasonable costs’ up to this point. After the freeholder serves his counter notice there is a period of two months in which the surveyors from each side will negotiate the price. Almost all lease extensions are settled at this point, however, if an agreement cannot be reached the price will be settled by a leasehold valuation tribunal.

Once the price has been agreed your freeholder’s solicitor will draw up the new lease or deed and send it to your solicitor.

We always endeavour to settle lease extensions by agreement with your freeholder. If you are fortunate, you may only need to pay for your own valuation and conveyance costs. Our valuation fees are quoted for individually and are dependent on the circumstances please call our professional department on 01273 20 1980 for a quote.

If an informal agreement cannot be reached it is frequently necessary to follow the statutory route. The statutory process has further fee implications which you will need to budget for. As well as your own surveyor’s valuation costs your solicitor will charge you for serving a section 42 notice. You will also be responsible for your freeholder’s valuation and legal fees. Lastly there will be a fee for any formal negotiations undertaken by your surveyor. We can provide you with a quote for our fees on request and we can also give you a guide of what to expect in legal fees.

In the unlikely event that the matter progresses to a tribunal there will be further professional fees the extent of which will depend upon the nature of the dispute.

You can assign your right to extend your lease to your buyer if you wish. In order to do this it will be necessary to first serve a section 42 notice. Once you have served a notice you can exchange on your property and your buyer can continue the lease extension process.

In most cases the buyer will expect the seller to bear the valuation and legal costs although this is sometimes negotiable.

Technically a share of freehold has the same value as a lease extension. There is, however, no legal right to a share of freehold (except by collective enfranchisement). Sometimes the freeholder will agree to offer a share of freehold with a lease extension. This is entirely at the freeholder’s discretion and the freeholder will often want to charge extra for the benefit.

If you are interested in purchasing your freehold by means of collective enfranchisement (i.e a group freehold purchase by a majority of leaseholders in your block) then please click on ‘buying your freehold’ in the main menu.

There are three main elements to a lease extension valuation. The first two elements together represent the market value of the freeholder’s interest in the flat. The third element (marriage value) represents the freeholder’s share of any profit deriving from the improved value of your property as a result of the lease extension.

1. Ground Rent - After the lease extension the freeholder will no longer collect ground rent on the flat and needs to be compensated for this loss. All the ground rents over the course of the term are capitalised using a widely accepted yield.

2. Reversion - At the end of the lease term the flat will, in theory, revert to the freeholder. As the end of the lease gets closer the freeholder’s reversionary interest becomes more valuable (at the same time your interest in the flat starts to diminish).

   The value to the freeholder of this element rises steeply as lease term falls below 80 years. A statutory lease extension of an additional 90 years effectively extinguishes the reversionary value of the freeholder’s investment and the freeholder must be compensated for this loss of value.

   The level of reversion is worked out using a yield known as a deferment rate, This rate has been set by land’s tribunal at the case commonly known as ‘Sportelli’. This decision is contentious. There are occasional exceptions to the yield set by this Land’s Tribunal and you should take advice from your surveyor to ensure the rate applies to your property.

3. Marriage Value - The value of your flat reduces as your lease term diminishes. Extending your lease increases the value bringing it back up to full market value. This increase in value is called ‘marriage value’. The freeholder is entitled to a 50% share of any potential ‘profit’ made as a result of the extension.

There are a number of factors affecting the valuation which will need to be assessed at the property including the market value of the property, lessees improvements, layout changes etc. The terms of the lease will also affect the overall valuation. These factors vary from case to case and will be covered in your valuation report.

After receiving your valuation report a lease extension can be agreed very quickly by informal negotiation. If the freeholder accepts a reasonable level the new lease can be conveyed in a matter of weeks.

Unfortunately there is often a significant discrepancy between the freeholders opinion of value and that of the flat owners surveyor. In this case you will need to serve your notice. The freeholder has two months from the time you serve your notice to have the lease extension valued by another surveyor and to serve their counter notice. Once the counter notice is served  there is a further two months of formal negotiations. The price is in most cases settled at this point between the surveyors –you should expect to pay additional fees for these negotiations. In the vast majority of cases the price is settled at this point. The whole process should take less than six months.

If the price cannot be settled between the surveyors it will be settled at tribunal. Attending tribunal has significant fee implications and can be time consuming, it is, however, very rare to resort to tribunal in lease extension cases.  

It may be possible to sell very short lease flats to cash investors however the asking price would need to be extremely heavily discounted to reflect the lease length. Buyers would expect the asking price to be dropped by far more than the lease extension cost. Attempting to sell a short lease without extending is rarely advisable as it has become increasingly difficult to find any buyers for short lease flats. However if you have no alternative cash buyers for short lease flats can sometimes be found at auction providing the asking price is at a reasonable level.