In this article we explain the difference between a formal and an informal lease extension.
We do not recommend the informal process. We believe it always costs the leaseholder more in the end. And it puts you at risk of a worse lease agreement than you currently have. Let’s look at why.
What is the formal lease extension process?
You are protected by the law if you choose the formal lease extension process. This is because there is a clear framework around the process. You know how long it will take, what the outcomes will be and how you would deal with any problems. With a formal lease extension:
- your lease extends by 90 years
- your ground-rent reduces to zero
- there is a fixed time-frame to follow
- your freeholder cannot refuse your lease extension
- your freeholder is very restricted on the changes they can make to your lease
- there are formal processes if your leaseholder is absent or unreasonable
What is the informal lease extension process?
There is no official or legal protection for you if you choose the informal lease extension process. With an informal lease extension:
- you usually have to pay your freeholder to provide you with a quote up-front
- you have to negotiate how long your lease will be extended by and how much this will cost.
- you have to negotiate whether your ground rent will be reduced
- your freeholder can make changes to your lease that might negatively affect other elements of your tenancy
- you are not protected if your freeholder drops out of the process or draws out the timeline to put pressure on you
- it’s a ‘take it or leave it offer’. There is nothing in place if you and your freeholder can’t come to an agreement
Why do people take the informal route?
Often a freeholder will present the leaseholder with a deal that looks good on the face of it. Put side-by-side with the cost of a formal lease extension, it might even be cheaper in the short term.
Because the informal process is just a conversation with your freeholder, you can save some money on professional fees.
So what’s the catch?
Remember that most freeholders are professional investors. They own your freehold to make money.
Every lease extension is a big pay day for them.
When informally extending a lease, freeholders like to offer to top your lease up to its original length of either 99 or 125 years.
This is great for them because you (or your children) will need to go through the lease extension process again in the next decade or two. That’s another pay day for them.
Even if you are planning on selling the flat, this is still a consideration. Increasingly buyers are wary of flats with short-leases so often ask the vendor to extend if the lease is below 95 years or so.
In fact, compared to the extension of 90 years lease on offer with a formal lease extension, it might mean another two or three pay days for your freeholder in the same period.
Short extensions aren’t the only issue. Three other big concerns are:
- rather than set your rent to zero, freeholders often use an informal lease extension to make changes to your lease so that your ground-rent will go up. Often it is changed to double, or rise with inflation, every ten years.
- freeholders often offer to ‘modernise’ the lease. In reality this can mean a chance for them to introduce more rules and fees for you.
- because of the ‘informal’ nature of the process, freeholders often dissuade you from hiring your own solicitor. This can leave you vulnerable to small legal tweaks that will have a big impact on your life.
Just say no!
A bad deal on your lease can make a huge impact on your life and your bank account. You could find your house hard to sell or mortgage, or that fees increase over time. Worst of all, you could find yourself back in the same position in a decade or two.
Our advice: make a decision for long-term and stick with the formal lease process.