One of the most common points made by our clients is that they did not appreciate all the implications of owning a leasehold property when they originally bought. One of the best summaries that explains what a lease / leasehold property is, along with the implications of owning a leasehold property, is as follows:

A lease is a right to use the property for a period of time. As a lease gets shorter the value of the lease and in real terms your property decreases and it becomes more expensive to extend the lease. Sometimes it is difficult to sell a property with a short lease (anything less than 80 years) because mortgage lenders may be reluctant to lend money on such properties.

Source: The Leasehold Advisory Service - www.lease-advice.org

In other words, as the lease gets shorter your property value decreases in real terms and therefore you are losing money everyday. It also follows that in order to pay the least amount to extend your lease it is better to do so sooner rather than later.

A lot of flat owners only become aware of the implications of a shortening lease when they come to sell their property, however, there are a number of reasons why you should consider extending your lease:

• Safeguard the value of your property from the effect of a shortening lease
• Make it easier to sell your property now or in the future
• Make it easier to mortgage or remortgage your property
• Safeguard the value to pass on to the next generation

As the number of years remaining on your lease diminishes, so does the value of your property. It also becomes increasingly more expensive to extend the lease over time. Therefore, to protect the value it is a good idea to agree an extension – and in the vast majority of cases it is better to do so sooner rather than later. 

From a cost perspective alone it is better to extend your lease sooner rather than later in the vast majority of cases, especially if your lease is nearing the 80 year threshold*. However, the potential conflict of the following two points should be considered:

• The performance of the property market can be significant. Lower property prices at the time of seeking an extension  make the cost of the premium cheaper;
• The longer you leave it, if values go up or even if they remain the same, the cost of the lease extension rises as the remaining number of years on your lease diminishes. 

If you are thinking of selling your property, bear in mind a well advised purchaser should normally be informed of the implications if the property has a lease with 85 years or less remaining. One of the main reasons for this relates to the impact of the 80 year threshold on the cost of the premium in the context of the qualifying criteria to extend a lease inside the provisions of the Leasehold Reform Housing and Urban Development Act 1993 - as amended (“the Act”). See Question 13.

In addition, it should be noted that leaving it too late to negotiate a lease extension when trying to sell your property with a short lease can put you in a pressurised and weak situation as the buyer, on advice from their solicitor and/or their mortgage lender, might demand the lease is extended prior to exchange of contracts. If your circumstances become known to the freeholder you may find the freeholder takes advantage and seeks a higher premium, playing on your fear of losing your purchaser as well as the new property you are looking to buy and potentially incurring abortive fees on both the sale and purchase.

Some buyers might accept you serving the Initial Notice and then assigning the benefit of the Notice on exchange of contracts in order to by-pass the two year ownership to qualify for extension, but they may look to negotiate a reduction off the agreed sale price to ensure the overall costs of extending the lease themselves are covered if not already reflected in the price.

Therefore if you are looking to sell in the near future, you should act now as you will be in a stronger position with time to negotiate a reasonable premium to extend your lease.

Not only does an extended lease make your property easier to sell, even if you are not selling in the near future, it will improve the value of your property, you will avoid being held to ransom by your freeholder when you do want to sell and you will make mortgaging / remortgaging easier.

*(Click here to see an example of the impacts on the premium)

It is the compensation paid to the freeholder to the loss incurred for granting a new lease or the loss of the freehold investment. Essentially the calculations account for changes in / loss of ground rent income and the fact that the property will not be returning to him/her for an extended period of time, or at all (in the case of buying the freehold). There is further compensation for any loss arising from the grant of an extended lease or selling the freehold (e.g. loss of development potential) and the freeholder’s share of the Marriage Value, if appropriate.

Yes. The purchase price includes all the leasehold interests and the participants have to pay for the non-participants. This said, if the flats of non-participators are under 80 years remaining the full amount of the share of Marriage Value is not included in the purchase price.

On completion the participants effectively become the freeholder to the non-participant flat owners. As and when future lease extensions are sought on those flats, the premiums are valued / updated as appropriate and paid to the original participants.

This is a potential stumbling block for leaseholders wishing to buy their freehold, either by collective enfranchisement or Right of First Refusal. In the first instance the participants should look into all feasible ways of obtaining the extra finance needed to cover the non-participating leaseholders. Failing this a “whiteknight” investor could be sought to provide the extra finance to enable the purchase to proceed.

The legislation stipulates that flat owner improvements made to the property are not included in the calculation of the premium for a lease extension and for the properties of the participants in a Collective Enfranchisement claim. This said, what improvements count as flat owner improvements under the technicalities of the legislation are for the valuer to advise, which is one of the main reasons why it is important to inspect the property / properties when undertaking a valuation.

Provided the appropriate qualifications are met (see Question 14), a flat owner is entitled to seek a lease extension on statutory terms, which are as follows:

• An extension of 90 years onto the existing term;
• A peppercorn (i.e. nil) ground rent.

It is not possible to say without knowing the specific details of the property and the lease. As an initial guide for budgeting purposes you should go to the Lease Extension Calculator on the Lease Advisory Service website (see ‘Useful Links’), taking note of the disclaimer on the introduction page.

If proceeding inside the Act (Formal route), the legislation stipulates the flat owner(s) is/are responsible for the payment of both flat owner professional fees and the “reasonable” professional fees incurred by the freeholder. The professional fees therefore include:

• Your own valuer’s fees for valuation and negotiating the premium / purchase price.
• Your own solicitor’s fees together with disbursements.
• The freeholder’s reasonable valuation fee.
• The freeholder’s reasonable legal fees.
• Your own valuer’s, legal professionals’ fees should the matter go to Tribunal. (NB The freeholder pays own professional fees).

N.B. If proceeding inside the Act (“Formal route”) it is important to note that once a Section 42 Notice is served, if you withdraw, you will still have to pay both your own and the freeholder's reasonable costs up to the point of withdrawal. You should therefore ensure you have established funds to pay all fees and the premium.

• Proceeding inside the Act for a lease extension or buying a freehold via Collective Enfranchisement: - Yes. Stated by the legislation.
• Proceeding outside the Act for a lease extension or buying a freehold via Collective Enfranchisement: – Possibly.
• Buying a freehold via Right of First Refusal: - No. The freeholder is to pay for their own fees out of the proceeds of the sale.

• Use the Lease Advisory Service Lease Extension Calculator to get an indication of the premium (see Question 9).
• Add your and the freeholder’s valuation and legal fees, including disbursements of say, £4,000 to £6,000.

The vast majority of premiums are negotiated. However, if negotiations fail when proceeding inside the Act, an application can be made to the First-tier Tribunal (Property Chamber) (“Tribunal”) to determine the premium. A general guide would be circa £5,000 for Tribunal costs, with the parties paying their own professional costs. This said, as of July 2013 the Tribunal’s powers to award costs in certain circumstances have been enhanced.

N.B. The above costs are approximate and for budget purposes only.

An extension can either be agreed “inside” the provisions of the Leasehold Reform Housing and Urban Development Act 1993 - as amended (“the Act”), provided you meet the minimum qualifying criteria (“Formal” route), or “outside” the Act (“Informal” route). (See ‘The Process’ for a flow chart of the different routes). However, the way to proceed largely (but not solely) depends on two factors:

• Do you qualify to proceed inside the Act?
• The approach of the freeholder and how reasonable he / she is perceived to be.

The legislation provides certain rights to the qualifying flat owner for the grant of a new lease within a prescribed timetable for the process, along with the provision (if required) of the Tribunal to settle the matter should no agreement be reached by the end of the process.

If you do not qualify to proceed inside the Act you only have the Informal route to consider. In theory, agreeing to extend the lease outside the Act should be more straightforward and cheaper, however, this is very much dependent on the approach of the freeholder, along with how reasonable and well advised they are.

Regardless of the route taken, you will need specialist professional valuation and legal advice.

• The flat owner has to have owned their property for at least two years;
• The original lease has to be for a period in excess of 21 years.

Provided the above criteria are met, any flat owner can extend their lease inside the Act, provided:-

• The freeholder is not the Crown Estate, The National Trust or a charitable housing trust;
• Where you own a shared ownership property and do not own 100% of the property. (However, we are aware that some Housing Associations may offer their Shared Ownership owners the opportunity to extend their leases on the basis they extend their lease but pay as if they own 100% of the property).

• You must own the property (albeit there is no two year minimum ownership requirement, unlike a lease extension claim);
• You need 50% or more of the flat owners in your building to participate*. If there are only two flats in the building, both must participate.

There are also a number of requirements the building must meet in order to qualify inside the Act, which should be discussed with your professional advisers.

*N.B. If you are purchasing the freehold via Right of First Refusal, you must have a majority, i.e. over 50% of the flat owners in your building participating.

The qualifying flat owner(s) serve(s) an Initial Notice (what is known as a Section 42 Notice for a lease extension claim or Section 13 Notice for a Collective Enfranchisement claim) on the freeholder, in which the premium / purchase price being offered (as advised by your valuer) is stated.

Ahead of a specified deadline in the Initial Notice (around two months from the Notice being served) the freeholder must issue a Counter Notice (which is known as a Section 45 / 21 Notice, respectively) acknowledging the claim and stating any disagreements, usually in respect of the amount offered.

From the date of the Counter Notice the parties have a total of six months to negotiate the premium / purchase price and any updating of lease terms (potentially relevant in lease extension claims). After the first two months application can be made to the Tribunal for a determination, but after the six months the right to apply to Tribunal is lost. Please click on ‘The Process’ tab for flow chart.

No. You can proceed without serving the relevant Notice inside the Act, however, you do not get the protection afforded by the legislation. This is not to say a satisfactory premium or purchase price cannot be reached, and savings are even possible through lower professional costs, however, success of this approach will depend on the parties involved and note it is just as important to get professional advice as freeholders may try to take advantage.

Proceeding inside the Act (Formal route): - From the serving of the Initial Notice, the process can take 8-10 months, but if the matter is referred to Tribunal for determination this can be over a year by the time a determination is given.

Proceeding outside the Act (Informal route): - This can vary hugely, literally from days to months etc. depending on how speedily the parties act and how soon the proceedings are taken inside the Act should negotiations fail, if possible.

A flat owner must have owned the property for two years to proceed inside the Act, however, you can request the seller serves the Initial (Section 42) Notice on the freeholder prior to exchange of contracts, as the benefit can be assigned to you upon exchange, thereby avoiding the two year wait to qualify.

N.B. It is vital to ensure you obtain professional valuation and legal advice from the outset in these circumstances to ensure the process goes through successfully and as smoothly as possible.

No. In reality very few proceed to Tribunal. Overall costs of seeking a determination via Tribunal need to be considered in the context of the amounts being argued for the lease extension premium or purchase price for the freehold. This said, there is a higher chance for a Collective Enfranchisement claim to proceed to Tribunal given the amounts of money involved and the fact the flat owners can divide their professional costs between them.

It can vary, but a general guide would be circa £5,000, depending on the nature of the claim and the issues involved. Each party is responsible for their own legal and valuation costs.

It should be noted that further costs apply if a Tribunal determination is appealed and the case proceeds to a higher court. This said, it follows that even fewer cases progress beyond the Tribunal.

For many, despite realising the benefits of extending a lease, having the necessary amount of money sitting in the bank might not be reality. You should seek advice from your financial adviser to explore ways to raise the money, or speak with your mortgage provider as safeguarding the value is also in their best interests.

If the property is to be passed on as inheritance, it could be something the next generation might be prepared to contribute towards – it is also in their best interests.

Despite a leasehold interest being a wasting asset, the legislation is such that 80 years is taken as the threshold where marriage value must also be included in the amount payable to the freeholder. This is the increase in value between the property with the existing lease versus the value with an extended lease, split and shared 50:50 with the freeholder.

Act now and seek professional valuation and legal advice. We have worked with a number of solicitors in such circumstances and we would be delighted to assist you with extending your lease.

The main point here is that leaving it too late to negotiate a lease extension when trying to sell your property with a short lease can put you in a pressurised and weak situation as the buyer, on advice from their solicitor and/or their mortgage lender, might demand the lease is extended. In these circumstances you may find the freeholder takes advantage and seeks a higher premium, playing on your fear of losing your purchaser as well as the new property you are looking to buy and potentially incurring abortive fees on both the sale and purchase.

In short, to put yourself in the strongest position, agree your extension before putting your property on the market. 

The reality is the answer is no different to that for Question 24. To ensure you are in the best position to sell your property, extend the lease before you look to sell. A prudent purchaser will normally be informed of the implications of a shortening lease and the two year ownership requirement for qualification and might look to buy a different property instead which does not have the same concerns.

Act now and seek professional valuation and legal advice. We have worked with a number of solicitors in such circumstances and we would be delighted to advise how best to proceed.

It is most likely that a prudent purchaser will ask you serve the Initial (Section 42) Notice on the freeholder, prior to exchange of contracts, the benefit of which is assigned to the purchaser, thereby he / she does not have to wait the two years to qualify. Acting quickly with competent, professional advice can prevent losing a sale as well as the new property you are looking to buy and potentially incurring abortive fees on both the sale and purchase.

As time progresses, the freeholder’s interest in your property will escalate in value, whilst your interest will fall in value. Once less than 80 years is left on a lease Marriage Value becomes applicable to the calculations, which will become increasingly significant as the lease length further diminishes.

Flat owners are increasingly learning, sometimes to their cost, that it is more difficult to sell their properties once the lease has a period of near 80 years or less remaining.

Prudent / informed prospective purchasers ask the Initial Notice be served by the seller at the very least. Any prudent flat owner should therefore consider obtaining a lease extension, especially before the lease reaches 80 years remaining.  

It should be noted that leaving it too late to negotiate a lease extension when trying to sell your property with a short lease can put you in a pressurised and weak situation as the buyer, on advice from their solicitor and/or their mortgage lender, might demand the lease is extended. In these circumstances you may find the freeholder takes advantage and seeks a higher premium, playing on your fear of losing your purchaser as well as the new property you are looking to buy and potentially incurring abortive fees on both the sale and purchase.

Therefore if you are not currently trying to sell your flat you will be in a stronger position as you will have time to negotiate a reasonable premium to extend your lease, without the worry of losing your sale or incurring any associated abortive costs. 

Not only does an extended lease make your property easier to sell, even if you are not selling in the near future, it will improve the value of your property, you will avoid being held to ransom by your freeholder when you do want to sell and it will make obtaining a mortgage / remortgaging easier.