A statutory lease extension is a formal process that extends a property lease by 90 years through legal practices. This differs from voluntary lease extensions. These are informal, with the leaseholder and freeholder negotiating the terms directly.
The value of a property can significantly decrease when the term is below 80 years. Leaseholders should apply for a lease extension to prevent this from happening.
In this guide, we’ll take you through everything you should know about statutory lease extensions. This includes the differences between the formal and informal processes.
What is a Statutory Lease Extension?
A statutory lease extension is issued by the Leasehold Reform Housing and Urban Development Act 1993. This Bill has received Royal Assent and is due to be administered. When implemented, the current ground rent will be reduced to ‘peppercorn rent’, meaning the leaseholder no longer has to pay this fee.
Lease extensions are advised for properties with 80 years or less left on the lease. This is because the value of the property can drop substantially as the lease is a depreciating asset. It may also be difficult to sell the property without a sufficient amount of time on the lease. It can be difficult to obtain a mortgage for a property with a short lease.
If you are wondering what happens when leasehold expires, the ownership of the property reverts to the freeholder, even if you have paid off your mortgage.
The Statutory Lease Extension Process
The leaseholder must serve the freeholder with an initial formal notice of claim, as per the Section 42 Notice. The freeholder will then have two months to respond. Both parties will receive a clear timetable that must be followed.
If the leaseholder misses a deadline, the freeholder will declare the application withdrawn. If this happens, the leaseholder must wait one year before reapplying. Any funds spent up to this point will be lost, meaning you will have to find more money when extending your lease again.
Advantages of Statutory Lease Extension
There are many pros to the formal process including the following:
- Additional 90 years to the existing term
- Freeholders cannot refuse your application if you meet the criteria
- Handled by solicitors
- More legal protection for the leaseholder
- No ground rent payment
- The remaining term will stay fixed once the application is submitted
Disadvantages of Statutory Lease Extension
Here are some cons to keep in mind when formally extending your lease:
- More expensive due to solicitor fees and statutory deposit
- Time-consuming
- You must have owned the property for at least two years
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What is a Voluntary Lease Extension?
A voluntary lease extension is also known as an informal lease extension. It refers to any extensions that take place outside the statutory route. If you do not meet the eligibility requirements for the formal proceedings, you can contact your freeholder.
The leaseholder and freeholder will negotiate on new terms directly. There is more flexibility available as voluntary extensions do not have to follow the same proposed terms as statutory.
Unlike statutory extensions, there are no strict deadlines to adhere to and the overall costs are likely to be lower in comparison.
The Voluntary Lease Extension Process
Freeholders prefer this process because it is handled privately. This gives the freeholder more control over the proceedings when negotiating. They are not beholden to the same rules as a statutory lease extension.
Solicitors are required during the negotiations. However, the costs are lower because there are no rules and legal checkpoints.
Some freeholders may agree to a lease extension in exchange for retaining their ground rent.
Advantages of Voluntary Lease Extension
Here are some advantages of informally extending a lease:
- Faster timeframe
- The extension does not have to be 90 years, allowing for more negotiation
- Other changes to the lease agreement may be made
Disadvantages of Voluntary Lease Extension
You should consider these cons before proceeding:
- Limited legal advice can lead to uninformed decisions
- Restrictive covenants may be added to the new lease agreement
- The freeholder can deny your application
- Marriage value premiums on properties that fall below 80 years
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Voluntary vs Statutory Lease Extension - Which One Should You Choose?
Getting a lease extension can be a complicated process, especially if your lease is close to expiring. This is why leaseholders should instruct a solicitor regardless of which method they choose. However, leaseholders have more legal protection when undergoing the statutory lease extension.
Here are some factors to consider:
Cost
Lease extension costs are higher for those choosing the formal process due to service charges such as legal fees. The remaining lease term and quoted premium can also dictate how costly the process will be. Premiums alone can cost upwards of £5,000.
There are still costs for document submission in the informal process, although this tends to be a lower amount.
Find out your estimated cost through our Lease Extension Calculator
Timeframe
Statutory procedures take longer as each party must negotiate via their solicitors. At the start of the process, the leaseholder will be issued a strict time frame of six months that includes all deadlines. If any of these are missed, they will be in breach of the application.
If the proposed terms are not agreed upon in six months, the leaseholder may take the case to a Property Tribunal.
Negotiations
Informal lease extensions provide more benefits to the freeholder compared to the leaseholder. However, if you have specific terms to negotiate and are happy to continue paying ground rent, then this may be the best option for you. Therefore, it’s best to think carefully before proceeding with this option.
Your solicitor can offer expert advice on the right option for your case. If you wish to extend your lease but would like more flexibility with the term length, it could be beneficial to choose the informal route.
Why You Need a Specialist Solicitor
A leasehold extension solicitor can ensure you make informed decisions throughout the process. Your solicitor will also negotiate and act on your behalf, meaning you’ll have someone representing you and your interests.
If you are looking to purchase or sell a leasehold property we can help. Compare My Move matches customers with experienced solicitors. Simply fill in our conveyancing comparison form to compare up to 6 quotes and save up to 70% on your solicitor fees.
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Key Takeaways
Statutory lease extensions are more expensive than voluntary extensions. However, they offer more legal protection for leaseholders. It ensures that all conditions are ironclad while also boosting your unexpired term by 90 years.
Voluntary lease extensions tend to be cheaper as they can accrue lower legal costs. They allow the leaseholder and freeholder to negotiate directly. Informal extensions do not have to follow the legal 90-year clause. This means the leaseholder can request several years that suit their needs.
Instructing a solicitor in either case will ensure that you have an expert acting in your best interest. Since lease extensions are complex, it’s imperative you submit the correct documents and do not miss any deadlines. If this happens during the formal process, you must wait 12 months before reapplying.
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