Apr 30, 2024

Understanding Informal Lease Extensions

Leaseholders hold the right to extend their leases, granted under the Leasehold Reform, Housing and Urban Development Act...

Leaseholders hold the right to extend their leases, granted under the Leasehold Reform, Housing and Urban Development Act 1993. This legislation empowers leaseholders to secure a 90-year extension on their lease term while reducing their ground rent to a peppercorn. In exchange, they must compensate their freeholder through a premium payment.

Statutory Process

The statutory process of lease extension entails serving a formal notice on the freeholder, awaiting a counter-notice for up to 2 months, and subsequently negotiating the premium. 

Should negotiations fail, the dispute may escalate to a Tribunal hearing. 

Given the intricacies involved, leaseholders often enlist the support of a surveyor and solicitor. Notably, upon serving the notice, leaseholders become liable for the freeholder’s legal and valuation expenses. The process can be protracted, with professional fees adding up significantly.

Appeal of Informal Extensions

In light of the complexities associated with the statutory process, leaseholders frequently explore informal lease extensions, facilitated through mutual agreement with the freeholder. 

Informal arrangements offer both parties the benefit of sidestepping the lengthy statutory procedure and enjoying greater flexibility in negotiating lease terms. This approach is particularly advantageous for leaseholders with amicable relationships with their freeholders or when the lease has a substantial unexpired term.

Risks of Informal Extensions

While informal extensions offer expediency and flexibility, they also present inherent risks. 

Unlike formal extensions governed by the 1993 Act, informal agreements are not bound by statutory provisions, leaving the terms open to negotiation. 

This scenario can be exploited by unscrupulous freeholders, especially when leaseholders lack access to expert advice. Instances have been reported where informal extensions resulted in unfavourable terms, such as shorter lease extensions with retained ground rent or punitive rent review provisions. Such arrangements can render properties un-mortgageable and unsaleable, leading to adverse financial consequences.

Mitigating Risks with Professional Guidance

Leaseholders contemplating informal extensions must prioritise seeking professional advice from specialist surveyors and solicitors. Expert guidance ensures informed decision-making and safeguards leaseholders’ interests throughout negotiations. Collaborative approaches, such as joint instruction of surveyors by both parties, facilitate impartial assessments and balanced agreements. By consulting professionals, leaseholders can tailor proposals to mitigate risks and ensure that the extension does not compromise the property's future value or saleability.

Fair Negotiations

Recent trends highlight an impartial approach to informal lease extensions, with chartered surveyors jointly instructed by freeholders and leaseholders. This collaborative model fosters transparency and fairness, assuring both parties that their interests are duly considered. Through impartial guidance, leaseholders and freeholders can navigate negotiations without resorting to adversarial processes involving multiple valuers.

Navigating the Lease Extension Landscape in Summary

Informal lease extensions offer a viable alternative to the statutory process, providing expediency and flexibility for both leaseholders and freeholders. However, navigating informal agreements entails inherent risks, necessitating careful consideration and expert guidance. 

By seeking professional advice and adopting collaborative approaches in respect of informed negotiations and impartial assessments, leaseholders can secure favourable terms while safeguarding their property's future.