This article is designed to be a long read that tells you absolutely everything you need to know about statutory lease extensions, your legal right to extend your lease.
If you’re simply looking for someone to help you do a lease extension, then you can learn all about our fixed-fee lease extension service. We’ll do everything you need for your lease extension.
A summary of what this article covers is as follows:
- What is a statutory lease extension?
- Why is it called that?
- Why should I do one?
- Who qualifies?
- What is the process?
- How long does a statutory lease extension take?
- What is the cost?
- What’s the alternative?
- Is the law changing?
- To conclude: How do I start a statutory lease extension?
Just want someone else to do this for you?
What is a Statutory Lease Extension?
If you own a flat, you almost certainly have a legal right to extend the lease.
This legal right is called a statutory lease extension and has several important benefits:
- You will receive an extra 90 years on top of the number of years remaining on your current lease
- Your ground rent will be set to £0 for the entire term of your lease
- Your freeholder will have to grant your extension on the same terms as your existing lease – so no new restrictions or charges!
- Your lease extension premium must be fair
- Your freeholder has to give you a lease extension within a set timeframe
Why is it called a statutory lease extension?
Your legal right is provided by a piece of legislation, also known as a “statute”. Rights coming from legislation are called statutory rights, and the lease extension is a statutory lease extension accordingly.
Sometimes a this type of lease extension is called a “Formal Lease Extension” or a “Section 42 Lease Extension”, but they are all the same thing. Again the term "Statutory Lease Extension" and "Statutory Leasehold Extension" are fully interchangeable.
The legislation for flats is the Leasehold Reform Housing and Urban Development Act 1993.
Why should I do a lease extension?
You’d be forgiven for thinking that a lease with 70 or 80 years left on it was a “long lease” – after all that’s nearly a whole lifetime!
However, this isn’t the case.
The day your lease drops below 80 years, it suddenly gets much more expensive to extend and as a result by the time you have:
95 years left on your lease, the value of your flat will start getting depressed by the fact that any future buyer will be factoring in the cost of a lease extension
90 years left on your lease, buyers will start getting put off the prospect of buying your flat – unless the discount for the short lease is significantly more than the cost of a lease extension
85 years left on the lease, some mortgage lenders will decline to lend on the flat (although probably not all of them)
79.9 years left on the lease, the cost of the premium will be somewhere between double and triple what it was before it dropped below 80 years
60 years left on the lease, you almost certainly won’t be able to find a mortgage lender for your flat at all.
0 years left on the lease, your freeholder will want the keys back!
Finally, one of the legal requirements of a formal lease extension is that it will reduce your ground rent to £0 from the point it is completed. As a result, if your ground rent is sufficiently high that it is preventing you from sell or mortgaging, a lease extension will sort that issue out too.
Most flat owners qualify for a statutory lease extension.
There are two common exceptions:
Exception 1: If you own a flat on a shared-ownership basis, you’ll almost certainly need to staircase to 100% before you extend your lease, or as part of the process.
Exception 2: If you haven’t been the registered owner of your flat for two years, you will need to wait until you have been before you can do your lease extension.
There are a few other less common restrictions – such as if your freeholder is the Crown Estate or the National Trust.
What is the statutory lease extension process?
There are three main parts of the lease extension process.
Step 1: Preparation and Valuation:
First, your legal documents will be reviewed. Your legal team will look at a copy of your lease and the title plan and title register from the Land Registry. They will also do the same for your freeholder’s title and check if there are any headleases too.
Once that’s done, a valuation report will be produced. This is to give you a really good idea of how much it will cost for you to do your lease extension. In our valuation reports, we break this down into three figures
High Figure: The maximum your freeholder can reasonably ask for, based on the evidence available.
Low Figure: A more optimistic view of what you might expect to pay for your lease extension.
Opening Figure: An opening figure to offer your freeholder. This has to be reasonable but can leave a little room for negotiation.
In addition to these figures our valuation will provide all of the evidence and calculations, so you can see how we have arrived at these conclusions.
Doing a proper valuation is important, because it provides the basis of the negotiation strategy – which will be needed to get you a fair price for your lease extension.
Step 2: Notice Serving and Negotiation
The negotiation process is started by serving a document called a Section 42 Notice on your freeholder. This is also sometimes called an Initial Notice or a Tenant’s Notice. This is an important part of a statutory lease extension as it claims your right to a lease extension and makes the initial offer. You need specialist support to make sure that this is done right.
Your freeholder will return fire with a Section 45 Notice also known as a Counter Notice. This will usually agree to your lease extension, but ask for more money.
Your valuation team will then negotiate with the freeholder’s valuer until they get a price that you are happy with.
If a fair price can’t be agreed, then a tribunal application can be made. This is quite uncommon: we end up at a tribunal hearing at about 1% of our cases.
Step 3: Conveyancing and Completion
Once the price has been agreed, the legal teams will kick back into action. Your freeholder’s solicitor will usually produce a short document which extends your existing lease.
Your solicitor will check that it only contains the changes that are allowed for a statutory lease extension. Weeding out any nefarious changes is one of the reasons you need specialist support.
Once the lease is agreed, both parties will sign it. Your freeholder’s solicitor will produce a final bill for your lease extension, called a completion statement and a completion date will be set.
After the lease extension is completed, your solicitor will register it at the Land Registry.
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How long does a statutory lease extension take?
A statutory lease extension is not something that happens overnight. This is broadly because the legislation offers quite generous timelines for the freeholder to do things.
During our lease extension service, one of our commitments is to make sure that we're always pressing ahead as quickly as we can be.
Because their professional advisors are not usually being chased by the freeholder, they often take their time to do anything.
Usually once a notice has been served you can expect the process to take somewhere between six and 12 months:
- Two months before the counter notice is returned
- One to six months of negotiating terms
- One to four months to complete the deal.
Our experience with public-sector landlords such as housing associations and local authorities is that we can often complete lease extensions within about six months.
For private developments it often takes longer, and often the extra time is spent negotiating the price.
What’s the cost?
When you do a statutory lease extension you need to pay three things.
Part 1: The “Premium”
This is the price you need to pay for the extension itself.
This has three components.
The first is called reversion and is compensation that you pay your freeholder for the fact they won’t get your flat back at the end of the existing term. This is based on the value of your flat and the number of years currently on the lease.
The second is to “buy out” the ground rent and compensate your freeholder for the loss of each of your future payments. This is based on your current ground rent payment, and how much it goes up over time.
The third is called marriage value. This is only payable if your lease currently has fewer than 80 years left on the lease. When you extend your lease, your flat will increase in value. You must share the hypothetical profit your make with your freeholder.
We’ve also written a more technical overview of how the lease extension premium is calculated.
We have also created a lease extension calculator, but like all calculators it does not take into account risinh ground rent.
If you can’t agree a fair price, you can take your freeholder to tribunal.
Part 2: Your Fees
When you do a lease extension you need a valuation and legal team to handle the process for you. It’s important that you use specialist team because they will know how to get you a fair price on the premium, make sure that your freeholder doesn’t change your lease and also make sure everything is done within the timelines.
We offer an “end to end” lease extension service which includes everything you need for your lease extension and the cost is £2,325+VAT.
Part 3: You Freeholder’s Legal and Valuation Costs
In addition to your own fees, the legislation also requires you to pay your freeholder’s reasonable fees for completing the transaction. The two exceptions to this – they can’t charge you their costs in negotiating the terms of the lease or if it ends up at tribunal.
Usually, we find that for public sector landlords, the freeholder’s costs are similar to our own – which is a little galling as generally the landlord’s advisors have to do less work! For private freeholders they can be more expensive.
If they’re very unreasonable, they can also be challenged at tribunal.
What’s the alternative to a statutory lease extension?
A statutory / formal lease extension involves you exercising your legal right to an extension, by serving a “Section 42 Notice” on the freeholder.
The alternative option is to simply contact your freeholder and ask them to what it is called an informal or voluntary lease extension.
Generally, informal lease extensions are not considered good idea because they allow your freeholder to:
- Simply put your lease back up to the original term (e.g. 99 years)
- Retain your ground rent
- Make changes to your lease, that don’t benefit you
- Request a premium that’s unreasonable, and then refuse to negotiate
- Take as long as they want to complete the transaction
One of the worst things about an informal lease extension is that often a freeholder will charge you a valuation fee up front (up to £1000) to give you a “quote”. This price doesn’t have to be fair, and they don’t have to share the valuation you paid for.
The same goes for the legal terms. You don’t know what “modernisations” the freeholder wants to make to your lease until you’ve committed to their legal fees. This means by the time you know the terms of the deal, you’re already committed to the process.
Equally on the last informal lease extension we did (we don’t do them anymore!) the freeholder changed their mind at the last minute and pulled out of the deal, and there was nothing that our client could do about it.
We've written a more detailed guide on the differences between informal and formal lease extensions.
Is the law changing?
The government have been promising since 2017 to make it cheaper for some people to do lease extensions.
In reality, this is likely to benefit people with leases below 80 years and high ground rents the most.
We don’t know when the changes will come into effect. If it’s not before next year’s general election, it’s unlikely to be before 2025 or 2026.
We’ve written a very detailed article on everything about leasehold reform.
To conclude: How do I start a statutory lease extension?
If you want to do a statutory lease extension, you will need to instruct a team of professionals to negotiate you a fair price for your lease extension and make sure that the update is registered at the Land Registry.
Historically leaseholders have instructed separate firms of surveyors and solicitors to do their lease extension. However, the problem with doing this is that you end up essentially being the project manager and chasing and coordinating two teams who are just doing their “bit”.
Instead, we offer a “one stop shop” lease extension service, which integrates both the valuation and legal work into a single service.