Leasehold dilemma: extend a lease now or wait for a better deal?

Among the myriad of decisions homebuyers and owners have to contend with is leasehold. The number of years left on a lease is crucial when it comes to remortgaging or selling your home, and any potential buyer will struggle to be accepted for a mortgage once the unexpired lease term falls below 70 years. As the government consultation on leasehold homes continues, the issue of extending a lease has become one of the central topics.

The “enfranchisement” process covers both extending a lease and buying the freehold to your home – individually if it’s a house, or collectively in a block of flats. The Law Commission has already put forward proposals to provide a better deal. It wants to see the process become cheaper and easier.

So what does the future hold for this complex process? Leases on both flats and houses are normally for 99 or 125 years from when the property is built. In theory, the property is returned to the freeholder when the lease expires – leaving the person who’s paid the mortgage empty-handed.

That’s a long way off for many people, but there are other more pressing issues. Firstly, the mortgage issue. Secondly, archaic rules mean lease extensions get much more expensive after the lease falls below 80 years.

There’s already a statutory process for extending a lease. The 1993 Leasehold Reform Act gives flat owners who have owned their property for at least two years the right to extend their lease by 90 years and have the ground rent reduced to zero. Flat dwellers also have the option to buy the freehold to their block, but they’ll need to club together with neighbours to do so. The rules are different for houses – you’ll only get an additional 50 years – and it might be better to buy the freehold instead.

Extending a lease can be a long and tortuous process – and it comes at a cost. The premium to be paid is a matter of negotiation between the leaseholder’s and freeholder’s surveyors – they deal with complex calculations around the current length of the lease, the location, the ground rent, the value of the flat with the lease as it is, and the value when it is extended.

Both sides also need a solicitor. Currently, the leaseholder pays for everything – the premium, their own surveyor and solicitor, and the freeholder’s, too.

The consultation and possibility of a new formula for lease extensions puts existing leaseholders in a dilemma. Every year they wait to extend their lease, the more expensive it gets.

So should you hold on and see what the government decides? “If you have a physical need to extend your lease, say your lease is approaching the 80-year mark or you need to sell, then you should consider taking action now,” says Louie Burns, managing director of Leasehold Solutions, a firm which helps leaseholders. “If not, our advice is that it would be prudent to wait for the outcome of the Law Commission’s proposals.”

Leaseholders may be tempted to negotiate an “informal” lease extension with the freeholder. This can be quicker – the statutory process can take up to a year – and, on the face of it, cheaper. For starters, you’ll only need to pay your own legal and surveyor’s costs, not the freeholder’s, too.

But if ever the phrase “false economy” applies, it’s here. When you extend your lease via the statutory process, your ground rent is reduced to nothing. But an informal extension could see it increase.

As Paula Higgins, chief executive of the HomeOwners Alliance, says: “With an informal lease extension you have none of the security or protection provided by the lease extension legislation. The freeholder can set the terms of the lease however they want, including hiking ground rents.”

An informal lease extension also doesn’t necessarily give you an additional 90 years – some unscrupulous freeholders might just extend it back up to 90 or 99 years. This means you, or a future owner, will have to go through the whole lease extension process again.

Burns also warns: “You have no legal right or protection when you enter into an informal lease extension with your freeholder. It’s a take-it-or-leave-it deal.”

“Your flat could easily become unsalable after the deal is concluded. Our advice is to always use the statutory route when extending your lease.”