Guide to Informal Lease Extensions

The Leasehold Reform and Urban Development Act, 1993, establishes the valuation basis and legal framework for leaseholders to extend their lease (as well as enfranchise). The most common way to enact the Act, is to serve a Section 42 notice with the help of a specialist solicitor, but this does come with a raft of stipulations and costs, and is a course of action that should not be taken lightly.

The alternative to serving such a notice is often referred to as the informal route, and amounts to an offer being put to the freeholder, which is then often followed by a period of negotiation. The main benefits of this route is that it is often much quicker and less expensive in terms of professional fees. However, without the protection of the Act in place, it is also fraught with pitfalls, and as such, needs to be managed very carefully. What follows, is a step by step guide, including at various points, when to cut your losses and resort to serving that good old Section 42 notice. It is also highly advisable that you talk each of these stages through with an experienced Leasehold Valuation Surveyor:

Step 1 – Identifying your freeholder

It is likely that you pay an annual ground rent to your freeholder, so a quick check of any letters or receipts will show you who they are. Alternatively, you can look at your lease or download a title register from the Land Registry. Essentially, at this stage, your surveyor will be looking to see whether or not your freeholder is a small to medium sized investor or a large institutionalised investor. If it is the latter, or if the surveyor knows that the freeholder has responded negatively previously, they may instantly recommend proceeding straight to a S42 notice.

Step 2 – Get a Leasehold Valuation

Peter Barry have an expert team that can advise you on the likely premium payable, which will include upper and lower ranges. If you want to get an initial insight as to what you would be looking at, try Peter Barry’s estimate calculator.

Step 3 – Write to your freeholder

This can either be done yourself or with the help of your surveyor – with the latter, Peter Barry will write to your freeholder with a proposed ‘reasonable’ offer and deal with any subsequent informal negotiations. The pitch of the letter is essentially that the price proposed is fair and that it is based on minimal negotiation time with the freeholder also being made aware of your option to serve a formal notice should this route prove too expensive or time consuming.

Step 4 – What happens next?

Your freeholder will now do one of 3 things:

1 – Ignore you

2 – Reply with an offer

3 – Reply, and inform you that they require an upfront fee to cover their surveyor’s valuation fee

The vast majority go for option 3, following which you end up at option 2, with an offer to consider. Unless you fancy trying to negotiate yourself, your surveyor will now step back in and try to negotiate the premium down to a level that is worth accepting. Most offers will be too high, for a shorter term that is desirable (99 years or perhaps 125 years) and will include an ongoing ground rent (usually £250 per annum, doubling every 25 years). It is critical that you speak with your surveyor to enable him to understand your end goal. You might only want a statutory 90 year extension with no ground rent, or alternatively, you may be content with a shorter term and to pay some ground rent, in order to pay as low a premium as possible.

Step 5 – Accepting or rejecting

Professional fees charged by a freeholder and their surveyor in respect of a S42 claim, for a property worth around £536,966 (the average price for a flat in London in 2017) and with a lease in excess of 60 years, are typically around £4,000 – £5,000. An offer worth accepting will need to factor in these costs as well as time and emotional factors. If a good deal is struck, then your file is handed over to your solicitor who will finalise the content of the new lease and register the title with the Land Registry. If it looks like you are being led down a dead end, or if the premium/offer is simply too unattractive, your surveyor will advise you to serve notice. The latter is a tough pill to swallow and you will have incurred some costs, so it is essential that you instruct a surveyor with appropriate experience of informal extensions, so they can pick up on the warning signs early.

Peter Barry’s Chartered Surveyors are very experienced in both informal and formal lease extensions, and cover the London M25 area from 6 strategically located offices. If you wish to obtain some free and impartial advice on your property, either email or call us on 020 7183 2578.