Informal lease extension explained
If you're looking to extend your lease, an informal lease extension can be a good option. But how does an informal lease extension differ from a statutory lease extension? And, what are the pros and cons of each? Here is everything you need to know.
If you own a flat in England and Wales, it is probably on a leasehold basis. This means that you own your property for a set number of years, but when the lease expires, you must hand the keys back to your freeholder. One option for you in this situation is to do an informal lease extension.
Fortunately, nearly all flat owners can extend their lease so they can continue ownership indefinitely.
How to extend your lease
There are two ways to get a lease extension:
- The first is to serve a notice claiming your legal right, known as a statutory or formal lease extension.
- The second is to simply agree a deal with your freeholder, known as an informal lease extension. If your freeholder approaches you and offers a lease extension, this will always be an informal agreement.
Historically, some leaseholders have favoured informal deals – because they appear quicker and cheaper.
While an informal lease extension might be less expensive than a statutory one, it often will not be a good deal. This is partly because the freeholder could pile on a high ground rent or introduce other charges or changes into the lease.
However, the commencement of the Leasehold Reform (Ground Rent) Act 2022 means that for any informal lease extensions granted after 30 June 2022, your freeholder cannot add any new ground rent into your lease. This change has the potential to level the playing field between informal and statutory lease extensions. Although, it is possible freeholders will introduce other charges to make up for the loss in ground rent.
Your lease extension rights
Before considering if an informal lease extension is right for you, you should first consider whether you want to extend your lease. And then look at the benefits you would get if you exercised your legal rights through a statutory lease extension – because this is the alternative.
The benefits of a statutory lease extension
1. You would add more years to your lease
The first benefit of a statutory lease extension is that it will always add 90 years to the unexpired term of your existing lease. So, if you’ve got 70 years now, you will have 160 years once extended.
2. You would remove your existing ground rent
The second is that it will remove your existing ground rent (if you have one) for the rest of the current term. It will also ensure it is set to a peppercorn (which means £0) for the extension too.
3. You would stay on the same terms
The third important benefit is that it entitles you to a lease on the same terms as your existing lease – which prevents freeholders from adding in new charges or restrictions that benefit them but not you.
4. You’re in control
Finally, with a statutory lease extension, you have control. Your freeholder must grant you a lease extension within a set time frame and at a fair price. If they don’t, you can threaten them with tribunal or court. Usually this action is not needed, and the threat alone keeps them honest.
What is an informal lease extension?
The alternative to a statutory lease extension is to contact the freeholder and ask them for a lease extension – either directly or via your solicitor.
There is nothing inherently wrong with an informal lease extension – it could be on near identical terms to a statutory lease extension. Your freeholder could charge you a fair price. However, the reality is that they are often abused by freeholders to get them a better deal. See the pros and cons below.
The pros of the informal lease extension
There are two main benefits of an informal lease extension:
It is cheaper
The first is that it might (appear to) be cheaper than a statutory one. Your freeholder might offer you a lower premium. Because the process is sometimes less time intensive, you might save on professional fees too.
It is quicker
The second is that it can be quicker. Once a deal is agreed, it can be possible for your lease extension to be completed in just a few months.
The cons of an informal lease extension
However, there are some significant drawbacks of informal lease extensions too.
Your freeholder can retain your ground rent (although they can’t add in more)
All new leases will have a ground rent of £0 and all leases extended through the statutory route, will have their ground rent removed too.
This makes flats with a ground rent a second-class asset – particularly if the ground rent is above 0.1% of the value of the property or above £250.
From 30 June 2022, your freeholder will no longer be able to increase your ground rent with an informal lease extension. However, they can leave the existing ground rent (including any scheduled rises) in your lease for the remainder of the current term.
Your freeholder can charge you a fee to offer you a bad price
One of the tricks freeholders do is to charge you a fee to give you a quote for your lease extension. This will usually range from £100 to £1,000+VAT.
Having taken your money, they will give you a quote for a lease extension and the price is often high. Even though you’ve paid for the lease extension valuation, they’ll only share their offer figure and not the valuer’s report.
The deal will be time-limited, i.e., you must accept within 30 days. Usually it will be a “take it or leave it” deal with limited room for negotiation.
Your freeholder will be banking on the fact that, having paid money upfront, you won’t want to abort the process.
Your freeholder might only extend your lease to 99 or 125 years
It is common to extend leases that currently have more than 100 years remaining. This is because buyers are becoming less keen to purchase property where they know they’ll have to extend the lease themselves.
For this reason, it can be a good idea to do a lease extension which won’t have to be done for a long time. With a statutory lease extension, the additional 90 years is usually enough to do this.
If you agree to a shorter extension and keep the flat, you’ll find yourself doing it again in just a few years. If you sell it, you may find your buyer won’t pay full asking price.
Your freeholder may make changes to your lease, but only once you are committed to the process
There are almost limitless opportunities in an informal lease extension to introduce “modernisations” – which are usually terms which benefit the freeholder and not the leaseholder.
For example, informal lease extensions where the freeholder adds significant charges. These include charging to answer enquiries from the leaseholder, allowing letting, remortgaging, selling and even keeping a pet. These are changes they simply can’t make with a statutory lease extension.
Once you’ve agreed the premium, your freeholder’s solicitor will ask for money up front (usually £1,000 to £2,000) to prepare the paperwork for your lease extension. As a result, you won’t see what “modernisations” your freeholder will make until you are committed to the process.
Although your solicitor will advise you of these changes, there is not much you can do about them – because you’ll have already committed significant professional fees into the process.
Your freeholder can drag their heels
One of the biggest disadvantages of the statutory lease extension is that it provides generous timelines, which allows the freeholder to move slowly.
However, with an informal lease extension, there are no timelines at all!
This means that if the freeholder doesn’t agree with you when you push back on the premium or lease terms, they are likely to simply say no – or just not respond. Even if a price is agreed, the freeholder is not legally obliged to complete the process. If they don’t, it will leave you £000s out of pocket.
There can be extra legal work
If you do a statutory lease extension, it is likely to be done via a short document which simply extends your lease. This is quick and easy for your solicitor to review.
If you do an informal lease extension, your solicitor is likely to be presented with a whole new lease – which could easily run to 30+ pages. This will require additional legal work to review to ensure it is correct and doesn’t have onerous clauses hidden within it.
Equally, when you do an informal lease extension you must gain the consent of your mortgage lender.
Usually, this process involves paying your lender a fee (Santander charge £105) and getting them to sign a document. They can be slow to respond, and the extra legal work will be an expense you will need to pay. The legislation for a statutory lease extension explicitly states that gaining the consent of your lender isn’t required.
Should I take the statutory or informal route to my lease extension?
An informal lease extension doesn’t have to be a bad thing – but it is much harder for you to ensure that you are getting a good deal. You must still get independent legal advice to ensure the lease is correct. But, if you do identify an issue or a problem with the arrangement, you have no legal recourse to sort it out. Ultimately, you may have to choose between accepting a bad deal or walking away from £000s in wasted costs and many wasted months.
The new legislation will prevent ground rent being increased via informal lease extensions and this could be the start of a new era of fairer informal lease extensions. However, they leave so much scope for your freeholder to introduce new charges this may not be the case.
The final thing to remember, is that your freeholder is not your friend – their priority is to make money. If they’re offering you a deal that seems too good to be true, it probably is.
Should I buy the freehold instead of extending my lease?
You should always consider if you can buy the freehold on your home so that you own it outright. This can be a more complicated process and you may need to pay more. For instance, you will have to get over half of all the leaseholders to agree which can be a big ask. Read more about what to consider in our guide Should I buy the freehold.
Thank you to Homehold for helping to produce this guide.