Formal vs. informal lease extensions

Linz Darlington | June 2022

If you want to extend your lease you have two options.

The first option is to exercise your legal right to a lease extension, under the Leasehold Reform Housing and Urban Development Act 1993. This means that your solicitor or agent will serve a formal notice on your freeholder. This is known as a statutory lease extension

The second option is to approach your freeholder and simply ask them for a lease extension – you can do this yourself or make the enquiry via your solicitor. This is known as an informal lease extension.

What's the benefit of a statutory lease extension?

A statutory lease extension is a gold standard lease extension. This means:

  • Your lease will be extended by 90 years
  • Your ground rent will be reduced to £0 for the entire term
  • Only limited changes are allowed to your lease

At least as importantly, a statutory lease extension puts you in the driving seat. Your freeholder is obliged to grant you the lease extension, and at a fair price. If they drag their heels or refuse to co-operate, you could take them to court or tribunal. While it is very rare to have to do this, the threat will keep your freeholder honest.

Why would you consider an informal lease extension?

Sometimes the informal route can seem attractive, perhaps because the freeholder suggests the price for the lease extension will be lower than the statutory alternative.

Equally, they might offer to grant the lease extension more quickly and further incentivise the deal through offering to keep legal expenses to a minimum.

What's the catch?

Despite this, we never recommend informal lease extensions. This is partly because an informal lease extension allows your freeholder to make changes to the terms of your lease and this means they can introduce new opportunities charge you money.

For example, historically, the biggest change your freeholder would make is to increase your ground rent - although this is not the only change they can make.

But isn't this changing?

Yes! From 30 June 2022 the Leasehold Reform (Ground Rent) Act 2022 means a freeholder can no longer increase the ground rent during a lease extension.

They can include your ground rent as it currently is (and any future rises), but they can’t increase it. In addition, for the additional years added to your existing term the ground rent must be £0.

Doesn't this sort out the issue with informal lease extensions?

We’ve seen flats which have been made unsellable by an increased ground rent. This change would prevent this from happening in the future and this is a great step forward.

However, it doesn’t sort out the wider issue with informal lease extensions.

What problems still remain with an informal lease extension?

This next section explains some of the issues that still remain with an informal lease extension.

Your freeholder will charge you hundreds of pounds to do a valuation, and then give you an unfair price.

If you ask your freeholder how much they will charge for an informal lease extension, they will almost certainly want to charge you a fee before they tell you. The valuation fee is likely to run into the hundreds of pounds.

Having taken your money, their valuer will probably quote you a price for your lease extension that is not a good deal.

You might be able to negotiate them down on the price, but equally they can just say no. Even though you paid for the valuation, the valuer will work for them and they don’t have to share their report with you.

Often you can find yourself left in the position of accepting a bad price or aborting the process.

You might only get a short extension

Under the legislation, the freeholder must give you a lease of an additional 90 years on top of what you already have. For example, if you have 70 years now, you’ll have 160 years at the end.

With an informal lease extension your freeholder may only offer a short extension.

We have spoken to leaseholders who originally had a 99-year lease and were offered a 125-year lease. Quite reasonably, they assume that this will run for 125 years from the date they extended the lease.

However, when it comes to doing the paperwork, the freeholder will leave the start date of the lease the same as the original 99-year lease – so they only end up with an additional 26 years! Going back to the example of the lease with 70 years left, you will now have 96. This might seem long, but in just a few short years you will be extending again.

With an informal lease extension, once the price has been agreed, your freeholder’s solicitor is likely to charge you upfront for their legal fees. This will usually be £1,000 to £2,000+VAT.

They won’t issue the draft paperwork until this fee has been paid.

This fee will be non-refundable, and they know this. This allows them to add restrictions and introduce charges into to your lease, and because you'll have invested money in the process, it limits your opportunity to challenge them.

Your freeholder can add new charges into your lease

With a statutory lease extension, the lease is often done using a short document which essentially extends the existing lease.

With an informal lease extension sometimes a whole new ‘modern lease’ will be produced. The freeholder can introduce new or increased charges into your lease – for letting the property, mortgaging it or even changing the colour of the front door. A whole new lease – usually 30+ pages long – makes it very easy for them to hide any nasty clauses.

We’ve recently attended industry events where the new ground rent bill has been discussed, and the participants shortly descended into discussions about innovative ways to replace the income stream lost through the ban of ground rents - everything from introducing fees to oversee the management company to charging to access common space.

Your freeholder can add new restrictions into your lease

Leases historically – for flats let before the 1980s – were short documents. Usually about 10 pages long. Modern leases are much longer – often 30 to 50 pages. It seems that a big part of the extra text is a long list of restrictions on what the leaseholder can’t do.

An informal lease extension will likely introduce new restrictions that might not have been in your original lease. This could be anything from restricting your ability to let the flat (particularly via something like Airbnb), preventing you from keeping a pet or making alterations for the flat.

Some of these changes are genuinely to improve management of the block, but others are simply to create an opportunity for the freeholder to restrict you from doing something. If you ask, they’ll graciously grant permission – and charge you a fee to do it!

A statutory lease extension will probably be done using a document that extends your existing lease – which is just a few pages of text for your solicitor to review.

As mentioned already, an informal lease extension is more likely to be done with a whole new lease. This creates a huge amount of work for your solicitor.

In addition, with an informal lease extension you need to seek the consent of your mortgage lender, which isn’t required with a statutory one. This requires more legal paperwork and that means more cost. Most mortgage lenders also charge a fee to approve a new lease – Natwest charge £85 – so you need to factor that in as well.

The process is uncertain - and that can mean slow

A statutory lease extension is not a fast process, it usually takes between six and twelve months to complete.

However, at least it has a clearly defined set of steps, and you will always end up with a lease extension at the end.

An informal lease extension has no defined timeline, and this means that it can drag on for a long-time.

Until you’ve signed on the dotted line, nothing is set in stone. This means that if the freeholder decides they want to increase the price, refuse changes to the lease, or simply pull out of the transaction all together – there is nothing stopping them.

Conclusion

When you own a leasehold flat, you don’t actually own the flat – you simply own the paperwork which allows you to use the property for a set number of years. Your lease is that paperwork. It dictates the terms of your ownership and a bad lease can introduce galling charges to pay while you own the property and make it hard to sell or mortgage the property in the future.

Despite the ban on ground rent in informal lease extensions, they still have the potential to be very damaging to your lease. Even if your solicitor does pick nefarious changes up, by that point you may have already invested several £000s and many months into the process.

Our advice is simply to exercise your legal right to a lease extension – so you know what you are getting!

Start your lease extension today

Article author photo

Linz is the CEO and co-founder of Homehold. He’s always looking at how we can improve our service and better support you through the lease extension process. If you have any questions about your lease he’d be delighted to help.

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