Fact 11. What is a Lease Extension?

A lease extension is the process of extending the term of a leasehold property, which is initially granted for a fixed period—usually between 99 and 125 years. 

As the lease term diminishes, particularly when it falls below 80 years, the value of the property can decrease, and the cost of extending the lease rises substantially. 

Typically, an extension adds 90 years to the remaining lease term, resetting the lease rent to a nominal "peppercorn" rent, which means zero or very low rent.

Being aware of the lease length and any upcoming lease extensions or onerous terms is crucial. Lease extensions significantly impact the property's market value, saleability, and mortgageability, so understanding the process and implications can save time, money, and avoid unexpected complications.

Why Lease Extensions Are Important

1. Property Value Protection

Leasehold properties with short leases—especially under 80 years—lose value because prospective buyers and mortgage lenders see them as risky investments. Extending the lease increases the market value and makes the property easier to sell or re-mortgage.

2. Avoiding Expensive Costs Later

The cost of extending the lease increases sharply as the lease dips below 80 years, due to the addition of a "marriage value" compensation to the freeholder.

3. Legal and Financial Security

Extending the lease formally under the Leasehold Reform, Housing and Urban Development Act 1993 protects leaseholders from unfair terms, such as increasing ground rents, which can be onerous and reduce property value.

Key Lease Extension Facts

- Leaseholders have a legal right to extend their lease by 90 years on top of the existing term, with the ground rent dropping to zero, after owning the property for two years.

- The cost of an extension includes a premium paid to the freeholder, legal fees, and valuation costs.

- The marriage value (a share of the increased property value after extending the lease) only applies if the lease has fewer than 80 years remaining.

- Informal or voluntary lease extensions might allow quicker negotiation but can include unfavourable terms like retained or escalating ground rents.

- A short lease (under 80 years) can reduce property value by around 40-50% compared to a long lease (over 99 years).

Process of Extending a Lease

The statutory lease extension process generally involves:

- Serving a Section 42 Notice to the freeholder, formally starting the process.

- Obtaining a valuation of the lease extension premium by a qualified surveyor.

- Negotiating terms including the premium and any other conditions.

- Finalizing the lease extension deed, which legally extends the lease.

- Costs include the premium for the lease, legal fees for both parties, and surveyor fees.

Onerous Terms That Can Affect Property Value

Some onerous lease terms, often seen in older or informally extended leases, include:

- Escalating ground rent: An annual rent that doubles or increases at regular intervals, which can become financially burdensome.

- Additional service charges: High or unexpected fees for maintenance and repairs imposed by the freeholder.

- Restrictions on use: Rules preventing alterations or subletting that could reduce buyer interest.

- Short extension terms: Lease extensions granted for fewer than the statutory 90 years, which may not adequately protect value.

- Forfeiture risks: Clauses allowing the freeholder to terminate the lease for minor breaches.

Why Buyers and Sellers Should Always Check Lease Terms

- Buyers should always review the lease length and any upcoming lease extension negotiations or disputes as part of their due diligence. A short lease or onerous terms can discourage mortgage lenders, reduce resale value, and create financial uncertainty.

- Sellers benefit from extending the lease before sale to maximise property value and ease the sale process.

- Property professionals should advise clients on lease length thresholds and potential cost implications to avoid last-minute issues.

Summary and Key Points to Remember

- Check lease length carefully, especially if under 80 years, as extending before this point is more cost-effective.

- Understand the lease extension process and anticipate costs including the premium and professional fees.

- Beware of onerous lease terms that can add significant financial burden or reduce marketability.

- Consider professional legal and valuation advice to navigate negotiations and secure a fair premium.

- Remember that the right statutory lease extension grants an additional 90 years and reduces ground rent to zero, enhancing property value.

Bullet Point Summary

- Lease extensions add 90 years to the current lease and reset ground rent to a peppercorn (usually zero).

- Property value decreases significantly as lease length falls below 80 years.

- Leaseholders have a statutory right to extend their lease after owning the property for two years.

- Extension costs include a premium to the freeholder plus legal and valuation fees.

- The premium reflects compensation for lost rental income and the landlord’s reversionary interest.

- “Marriage value” is payable when leases have fewer than 80 years left and is split equally between leaseholder and landlord.

- Informal lease extensions can have unfavorable terms like rising ground rent or short extension periods.

- Always check for lease extensions, onerous terms, or disputes before property purchase or sale to prevent loss of value.