Should you Extend your Lease?

Understanding leasehold ownership

With a leasehold property, you own the lease for your home for the remaining term of that lease, while the freeholder owns the building and the land it stands on. The freehold and the lease are separate interests: owning a lease does not mean owning the freehold.

Many flats in London are sold with a share of the freehold. This means the flat owners collectively own the freehold of the building and the land it stands on, while each flat owner still has their own lease. The individual lease remains the document that sets out each flat owner’s rights and responsibilities within the building.

Understanding the distinction between the freehold and the lease is important when considering a lease extension, as it is the length of the individual lease that matters to buyers and mortgage lenders.

Why lease length matters

The remaining term of a lease is an important consideration when selling, as buyers and mortgage lenders will look at how many years are left. The 80-year mark is an important threshold for leasehold properties.

A lease with fewer than 80 years remaining can be harder to sell, as buyers may find it more difficult to secure a mortgage. Lenders consider lease length when deciding whether to lend because a shorter lease can affect the property’s future value and how easily it can be sold.

For sellers, this can affect buyer confidence and lead to negotiations around the cost of extending the lease, which may impact the final offer.

Checking your lease length early gives you time to understand whether you need to take action before selling.

The 80-year threshold

The 80-year mark is an important threshold when considering a lease extension. Under the current rules, extending a lease with 80 years or fewer remaining can be significantly more expensive because the calculation may include what is known as “marriage value”.

Marriage value reflects the increase in the property’s value created by extending the lease. The government is introducing reforms that will remove marriage value from the calculation, but these changes are not yet fully in force.

For this reason, the length of your lease remains an important consideration. Every property and lease is different, so the right time to act depends on individual circumstances.

How much does a lease extension cost?

There is no fixed cost for extending a lease. The premium you pay depends on several factors, including:

• the remaining length of the lease;
• the property’s current market value;
• the value of the property once the lease has been extended;
• the ground rent payable under the existing lease; and
• the value of any improvements made to the property.

Because every lease extension is different, professional advice is the best way to establish the likely cost.

Getting advice

If you decide to explore a lease extension, one of the first steps is usually to instruct a specialist surveyor to carry out a valuation. They will inspect the property, review the existing lease and consider any improvements that may affect the valuation. This helps establish the likely cost of extending the lease and gives you a clearer picture of what to expect.

Your solicitor will then guide you through the legal side of the lease extension.

Considering your options

Not every leasehold owner needs to extend their lease straight away. What matters is knowing when the length of your lease may start to affect your options.

Checking how many years are left gives you time to understand those options, consider the potential cost and decide on the best approach for your circumstances.

If you would like to understand more about the differences between freehold and leasehold ownership, including the benefits and considerations of each, read our Insights article Freehold vs Leasehold Explained.