How Much Does It Cost to Extend a Lease?

If you own a leasehold property, one of the key things you'll need to consider at some point is extending your lease. The length of your lease directly impacts the value of your property, and as it decreases over time, the cost and complexity of extending the lease grow.

Understanding the costs involved is crucial to making an informed decision about when to extend your lease and how to manage the financial impact.

In this blog, we’ll take a detailed look at the various factors that determine the cost of extending a lease, how the process works, and the options available to leaseholders in the UK.

Why Does Lease Length Matter?

A lease is essentially a long-term rental agreement with a fixed duration, typically set for 99, 125, or even 999 years. The freeholder (landlord) owns the land on which the property stands, while the leaseholder owns the rights to the property for the duration of the lease.

When the lease expires, ownership of the property reverts back to the freeholder unless the lease is extended.

As a lease gets shorter, the property becomes less attractive to buyers and mortgage lenders, which can significantly affect its value. The most significant milestones for a lease are:

• 80 years: When the lease falls below 80 years, the cost of extending it increases due to the addition of "marriage value" (we'll explain this later). Mortgage lenders may also be reluctant to provide loans for properties with short leases, which can make it harder to sell.

• 60 years: Extending a lease at this point becomes even more costly, as the shorter lease length diminishes the property's market value.

The Process of Extending a Lease

Leaseholders have the legal right to extend their lease, and in most cases, this process is governed by the Leasehold Reform, Housing and Urban Development Act 1993. The law gives qualifying leaseholders the right to extend their lease by 90 years, with a significant reduction in ground rent, usually to a “peppercorn” amount

(effectively zero).

Here’s a brief overview of the key steps involved in extending a lease:

• Valuation: Before starting the process, it’s essential to get an estimate of how much it will cost to extend the lease. A specialist surveyor can carry out a valuation and provide a guide to the premium (cost) you’ll need to pay to the freeholder.

• Serve a Section 42 Notice: Once you have your valuation, you can formally notify the freeholder of your intention to extend the lease by serving a Section 42 Notice. This document outlines your proposed premium and terms for the extension.

• Freeholder’s Response: The freeholder must respond within a set timeframe, usually two months, with a Section 45 Counter-Notice. This will either accept your proposal or make a counteroffer.

• Negotiation: In most cases, the leaseholder and freeholder negotiate the final price and terms. If an agreement cannot be reached, the matter can be referred to the First-tier Tribunal (Property Chamber) for resolution.

• Lease Extension Agreement: Once the price and terms are agreed upon, legal work is carried out to amend the lease, and the extension is formally registered with the Land Registry.

How Much Does It Cost to Extend a Lease?

The cost of extending a lease can vary significantly depending on several factors. Below, we’ll explore the key elements that determine how much you’ll need to pay.

1. The Premium

The premium is the main cost you’ll pay to the freeholder to extend the lease. This is essentially a lump sum calculated based on the value of the property, the remaining length of the lease, and any potential “marriage value.”

The premium can range from a few thousand pounds to tens of thousands, depending on these factors.

Key Factors That Influence the Premium:

• Property Value: The more valuable the property, the higher the premium. Properties in areas like London or other high-demand locations will attract higher costs.

• Remaining Lease Length: As the lease gets shorter, the cost of extending it rises. Once the lease falls below 80 years, the premium increases significantly due to the introduction of marriage value.

2. Marriage Value

Marriage value is a crucial concept to understand when extending a lease. It refers to the increase in the property’s market value once the lease is extended.

The marriage value is shared between the leaseholder and the freeholder, with the freeholder entitled to 50% of the increase in value.

Marriage value only applies when the lease has fewer than 80 years remaining.

For example, if the property value increases by £20,000 due to the lease extension, the freeholder would be entitled to £10,000 as part of the premium. This can significantly increase the cost of extending a lease.

3. Ground Rent

When you extend a lease, the ground rent you pay to the freeholder is typically reduced to a nominal amount, known as a peppercorn rent.

This effectively means you no longer pay ground rent. However, if you don’t follow the statutory process (i.e., under the Leasehold Reform Act 1993), the freeholder may retain the right to charge ground rent at the current or revised rate.

4. Legal and Valuation Fees

In addition to the premium, you’ll also need to cover several professional fees as part of the lease extension process. These include:

• Valuation fees: You’ll need to hire a specialist surveyor to provide a valuation of the premium. This typically costs between £500 and £1,500, depending on the complexity and location of the property.

• Legal fees: Both the leaseholder and freeholder will need legal representation to complete the lease extension. You will be responsible for your own legal fees, as well as the freeholder’s “reasonable” legal costs. Legal fees can range from £1,000 to £3,000 or more.

• Tribunal costs: If negotiations break down and the case goes to the First-tier Tribunal, you may incur additional costs for representation and tribunal fees.

5. Land Registry Fees

Once the lease extension is complete, you’ll need to register the updated lease with the Land Registry. Land Registry fees for lease extensions are typically modest, usually between £40 and £125 depending on the property value.

6. Stamp Duty Land Tax (SDLT)

If the premium for extending the lease exceeds certain thresholds, you may also need to pay Stamp Duty Land Tax (SDLT). As of 2024, the SDLT thresholds are as follows:

• £125,000 for residential properties
• £150,000 for non-residential properties or mixed-use properties

If the premium you pay for the lease extension is below these thresholds, SDLT won’t apply. However, if the premium exceeds these limits, you’ll need to pay SDLT on the portion above the threshold.

Example: Calculating the Cost of a Lease Extension

To give you a better idea of the costs involved, let’s look at an example. Suppose you own a flat in London valued at £400,000 with 75 years remaining on the lease. Here’s a breakdown of the potential costs:

• Premium: The estimated premium to extend the lease could be around £10,000 to £20,000, depending on factors like property value and location.

• Valuation fees: You’ll likely pay around £1,000 for a surveyor to provide a valuation.

• Legal fees: Legal costs for both parties could amount to £2,500 to £3,500.

• Land Registry fees: These would be around £125 for a property of this value.

• SDLT: If the premium is above £125,000 (unlikely in this case), you may need to pay SDLT.

In total, the cost of extending the lease could range from £13,625 to £24,625.

Can You Negotiate the Cost?

Leaseholders often wonder if the cost of extending a lease is negotiable. The short answer is yes, but it depends on several factors. The premium is usually calculated based on established formulas and property valuations, so there’s limited scope for negotiation.

However, leaseholders can sometimes negotiate legal and valuation fees with the freeholder. For instance, if you and the freeholder can agree on a premium without needing to go through formal legal channels, this could save on professional fees.

It’s also worth noting that if the freeholder proposes an unreasonably high premium, the leaseholder can challenge the figure through the First-tier Tribunal.

Voluntary Lease Extensions vs. Statutory Lease Extensions

There are two ways to extend a lease: voluntarily or through the statutory process under the Leasehold Reform Act 1993.

• Voluntary lease extensions: These are negotiated directly with the freeholder. While they may offer more flexibility in terms of the lease length or ground rent terms, they are not protected by law, and the freeholder could impose unfavourable conditions.

• Statutory lease extensions: This option provides more security for leaseholders, as the terms are set out by law. Leaseholders can extend the lease by 90 years with ground rent reduced to a peppercorn. The freeholder must comply with the statutory process, but this route can be more costly due to additional legal and valuation fees.

Conclusion: Is It Worth Extending Your Lease?

The cost of extending a lease can be significant, particularly if the lease has fallen below 80 years and marriage value applies. However, extending the lease is often a worthwhile investment in the long term, as it can increase the value of your property and make it more attractive to potential buyers.

If your lease is approaching the 80-year mark, it’s usually better to extend it sooner rather than later, as the costs will only increase as the lease gets shorter. For leaseholders planning to sell their property in the future, extending the lease can also make it easier to secure a sale, as many buyers and mortgage lenders are wary of short leases.

Before starting the process, it’s essential to seek professional advice from a surveyor and solicitor (such as Pathway Conveyancing) who specialise in lease extensions. They can guide you through the process, help estimate the costs, and ensure that you get the best possible deal on your lease extension.

By understanding the costs and process involved, you’ll be better prepared to make an informed decision about extending your lease and safeguarding the value of your property.