What is a leasehold property?
A leasehold property is sold under a legal agreement that grants the purchaser ownership of the property for a certain period of time (ie a lease). The owner of this interest in the land (ie of the lease) is called a ‘leaseholder’. These leases are commonly granted for terms of 99 years, but the term can be anything up to 999 years.
When a leasehold is granted, the freeholder still owns the freehold of the property (ie an indefinite ownership interest in it) and the land it stands on for an unlimited period. The leaseholder essentially rents the property from the freeholder for a set period of time.
Leaseholders may be subject to various restrictions. For example, they generally need to ask the freeholder for consent before making any substantial changes to the property (eg building an extension, making any major alterations to the property, owning pets, or putting up a satellite dish).
Those who held a lease before 30 June 2022 usually must also pay an annual ground rent (ie a charge for renting the land that the leasehold property sits on).
For more information, read Freehold and leasehold property.
Can a lease be extended?
As a lease nears its end date the value of the property may decrease, as the interest that’s being sold will not exist for a long time. If a leaseholder wishes to sell their property, extending their lease first may result in a higher sale price. Even if they do not wish to sell, a leaseholder will generally wish to extend their lease before it expires.
When should a lease be extended?
As a rule of thumb, if a lease has less than 90 years left to run it should be extended to avoid depreciation and to avoid deterring any potential buyers. This is partially because mortgages can be more difficult to obtain on properties with leases shorter than 90 years.
Leases that have less than 80 years to run become more expensive to extend, and those below 60 years can cost an additional 1% of the property value to extend.
How can a lease be extended?
The first step is for the leaseholder to inform the freeholder that they wish to extend their lease. Then, there are 2 possible routes to take: a statutory lease extension or an informal (ie voluntary) lease extension.
Statutory lease extensions
This option follows a specific set of rules imposed by law. Under the Leasehold Reform, Housing and Urban Development Act 1993, a leaseholder usually has a right to extend the leasehold for a flat by 90 years. Under the Leasehold Reform Act 1967, it is normally possible to extend the leasehold for a house by 50 years.
The process for extending leaseholds varies depending on the property type involved. However, it generally involves a professional valuation, a formal offer and negotiations, and an application to a tribunal.
Informal lease extensions
Informal lease extensions are extensions agreed to by negotiation between the freeholder and leaseholder. The rules above need not be followed and the parties can agree on the terms of the extension with few limitations. The parties may end up with a better deal than if they’d taken the statutory route, but there will be less certainty as to the extension process.
Due to the complexity of leasehold extensions, it is a good idea to Ask a Lawyer for professional advice on your situation before you start the process.
For more information, see the government’s guidance on leasehold property.
How much does it cost to extend a lease?
The cost of extending a lease will depend on a variety of factors. For a statutory extension, these contribute to a calculation that takes place within well defined parameters (ie it’s not just up to the parties’ absolute discretion). Relevant factors include the:
value of the property
number of years left on the current lease
annual ground rent, and
value of any improvements made to the property
A preliminary lease extension calculator is available from the Leasehold Advisory Service.
It’s largely up to the parties to agree on the costs involved in an informal lease extension. However, ground rent generally cannot be charged on an extension granted after 20 June 2022.
What has the Leasehold Reform (Ground Rent) Act 2022 changed?
The Leasehold Reform (Ground Rent) Act 2022 alters the law on lease extensions. It’s provisions generally apply to leases created:
on or after 1 April 2023 for leases of retirement homes, and
on or after 30 June 2022 for all other new leases
Under the Act, anyone buying a leasehold property under a new lease won’t have to pay ground rent. Technically, they only need to pay ‘peppercorn’ rent, meaning ‘an annual rent of one peppercorn’. This charge of literally one peppercorn is not actually enforced and in practice it means no charge.
This peppercorn ground rent restriction also applies to informal lease extensions negotiated by existing leaseholders.
For more information, see the government’s guidance on the Leasehold Reform (Ground Rent) Act 2022 and the Welsh government’s guidance on the Act.
What is lease enfranchisement?
Leaseholders can sometimes purchase the freehold of their property, making them the freeholder. This process is known as enfranchisement.
In the case of blocks of flats, it is sometimes more cost effective for leaseholders to group together to purchase the freehold of the building, rather than individually renewing their leases. This is called collective enfranchisement.
Enfranchisement is a complex process, so anyone considering this option should Ask a Lawyer for professional advice.
For more information, read Leasehold enfranchisement.
Changes to leasehold ownership have been proposed
The government has confirmed its intention to make it easier and cheaper for leaseholders to buy their homes via a new Leasehold and Freehold Reform Bill. A number of changes have been proposed, including:
banning new leasehold houses in England and Wales (new leasehold flats will still be allowed)
the right for house and flat leaseholders to extend their leases by 990 years at a ground rent of £0
setting a maximum time and fee for the provision of information to a leaseholder by the freeholder, making it easier for leaseholds to be bought and sold
requiring transparency regarding all leaseholders’ service charges
extending access to redress schemes for leaseholders, to challenge poor practices
building on the Building Safety Act 2022 by ensuring freeholders and developers must fund building remediation work
allowing all leaseholders to benefit from these changes, even if they have not owned the leasehold for at least 2 years (a restriction that exists currently)