Guide to Extending a Leaseholder’s Lease
In our guide to lease extensions, we look at how a leaseholder can extend their lease and what pitfalls you should look out for.
What is a Lease Extension?
A lease is, in effect, a right to exclusively use and occupy a piece of land (such as a house and garden or flat in a block) for a fixed period of time (the term).
An the end of the term the right to use and occupy comes to an end and the landlord, who owns the freehold, is free to do what he wishes with the land.
An extension is where a premium is paid to the landlord in order to increase the length of the term, so that the lease does not expire.
Why Would I Extend My Lease?
As mentioned above, once the term expires the property returns to the landlord. If you have paid money for the property this will be lost. The problems associated with diminishing terms however start long before the term comes to an end. As the number of years remaining on the lease becomes less and less, so the value of it reduces. It’s really quite simple – if you pay £100,000 for a lease with 99 years to run and look to sell it when there are just 50 years left then (ignoring inflation) you cannot expect to get £100,000 for it.
The real issues arise when the term drops below 70 years. This is because each mortgage lender will have a minimum term on which it is prepared to lend, usually ranging from 55 – 70 years. Once a property becomes unmortgageable the majority of potential buyers are lost which will of course drive down the price.
Where Do I Start When Extending My Lease?
The first step is to approach the landlord. If you’ve owned the property for more than two years (that is, you personally, it is not enough that the lease is more than two years old) then the landlord is obliged to grant an extension. 
If you have owned the property for less than two years he can still agree to your request but he is not obliged to. He is entitled to charge a premium and this will need to be agreed between yourselves before you proceed. It should be a fair market price for the length of extension you are buying and the landlord will usually instruct a valuer at your expense. The valuation fee will be payable whether or not you proceed. What is a fair market value will depend on the current value of the property and the length of the extension you want to buy. If you are unhappy with the premium the landlord requests and cannot reach an agreement then you can contact the Leasehold Valuation Tribunal for a ruling. You should try to exhaust other avenues of negotiation first.
How long should I extend my lease for?
As a rule, as long as possible, by which I mean as long as the landlord will allow and you can afford. In practice the landlord will usually agree to extend it back to the original term, which will usually be 99 or 125 years. Sometimes he will agree to extend it to 999 years, though effectively this means it will never need to be extended again and as such the premium is likely to be higher.
The Legal Paperwork
Once a premium has been agreed the landlord will usually instruct a solicitor to prepare a Deed of Variation (or sometimes a Deed of Surrender and Re-Grant) which is the document used to extend the term.
If he asks you to draft the deed then you will probably have to instruct a solicitor to do this for you.
The deed could take various forms but will basically contain a clauses stating that certain clauses in the original lease, which set out the start date and term, are replaced by new clauses, so for example it might say “The definition of Commencement Date in the Original Lease shall be varied so as to read 01 May 2010”. It should also confirm that in all other respects the lease shall continue in full force and effect. What the landlord might do is try to introduce other changes, such as increasing the annual ground rent or imposing an obligation on the leaseholder to obtain the landlord’s consent before selling the property. The offer to extend the lease may be conditional on these changed being agreed but as with the price, they can be negotiated and ultimately referred to the LVT.
Completion
Once you are happy with the draft deed and you confirm this to the landlord’s solicitor, he will prepare an “engrossment” for you to sign. This will be the “counterpart” and will be retained by the landlord. You should sign it and pay the premium together with any costs. As mentioned above you will need to pay the valuation costs and you will also usually need to pay the landlord’s legal fees.
One you have done all of the above the landlord’s solicitor should send you the original deed executed by the landlord. The matter is now completed, though for it to be fully effective in law it will need to be registered.
Registration of the Lease
Whether the deed is drafted as a “Deed of Variation” or as a “Deed of Surrender and Re-Grant”, it will in law operate as a surrender of the existing lease and grant of a new one. For this reason it will be necessary, if the premium paid is greater than £40,000, to complete a Stamp Duty Land Tax Return (form SDLT1) and to obtain a certificate in form SDLT5 from HM Revenue & Customs. In the unlikely event that the premium is greater than £125,000 there will be duty payable.
It will also be necessary to register the deed with Land Registry. The form to be used is the AP1 and the application will need to include the SDLT5 certificate if applicable, the deed itself and a copy, and a cheque for the appropriate fee. Until the deed is registered it will potentially not be binding on future owners of the freehold.
Photo by ShironekoEuro
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