Informal Lease Extensions: The solution to the formal process?

For many, the statutory route to extend their lease, is more favorable than agreeing to extend the lease by informal agreement, as the statutory route entitles the leaseholder to an additional 90 years plus their unexpired lease term and reduces rent to a peppercorn. However, this route is not always possible for many leaseholders.

In order to extend a lease via the statutory route and pursuant to the Leasehold Reform Housing and Urban Development Act 1993 the property must have been registered in the leaseholder’s name at HM Land Registry for a minimum of two years.   Where leaseholders do not meet this two year requirement they can approach their landlord, once having obtained  the expert advice of a surveyor as to the terms, and with a view to agreeing terms of a lease extension directly with their  landlord. However landlords are not obliged to agree to an informal lease extension.

Whilst an informal lease extension is a solution to any leaseholder not meeting the qualification period and sometimes even those that do, expert advice should be sought from a surveyor with regards to acceptable premiums (a premium being the price payable for the additional years granted) and ground rents, and from a solicitor in relation to the drafting of the new Lease. If a leaseholder has 80-85 years unexpired term left on their lease surveyors and solicitors will be able to advise if it would be more beneficial for a leaseholder to proceed down the statutory or informal route based on the specific circumstances. Unlike the statutory route, an informal lease extension can be agreed directly between a freeholder and a leaseholder on any terms they agree.

However, this route should be approached with caution by leaseholders as often ground rents are imposed and the landlord is free to propose any terms which may be included in the new lease with regards to term, ground rent and premiums payable or indeed to seek to change the terms of the lease itself.

There is also no strict timeline for either landlords or leaseholders to adhere to in such a transaction and the landlord is not bound to honor the terms until the new lease is actually entered into.  Further to this, if a leaseholder has a mortgage over the property, the consent of the lender will need to be obtained to the lease extension unlike the statutory route whereby the consent is automatically applied under the legislation.

Whichever route is embarked upon, a leaseholder should look to extend their lease in good time prior to the lease nearing 80 years unexpired term. Once a lease does hit 80 years or below, the premium will be increased due to the ‘marriage value’ payable to the landlord.