What options are available when extending your lease

Every freeholder will have different financial motives when it comes to extending the lease. Some may have short-term financial objectives and in turn are happy to extend the lease under statutory terms while others will look to improve the value of the asset by improving on the ground rent.

Statutory extensions derive from the Leasehold Reform, Housing and Urban Development Act 1993, and the process is started by serving a Section 42 notice. It enables leaseholders to obtain a 90-year extension of their lease with a peppercorn ground rent - however at what cost?

Not only is a statutory extension a long and protracted process, it is also extremely costly with the leaseholders being liable for all of the freeholder’s costs incurred throughout the process. On top of this the freeholder will also look to achieve a premium which reflects the loss of the ground rent and the extended reversionary date. Freeholders are regularly labelled as ‘exploitative’ and ‘greedy’, however the aim of every investor is to ensure they maximise the return on their investments.

In stark contrast to this is the non-statutory option or ‘informal’ process. By opting for this approach the freeholder is able to offer the leaseholder a substantial discount on their lease extension premium in return for an improved ground rent and a slightly shorter lease extension - a win-win situation for both parties. Some may argue this approach favours the freeholder but non-statutory deals can provide the most amicable of settlements for both parties.

The ground rent investment market is extremely buoyant at present so freeholders are looking to maximise the value of their assets with investors paying high prices for freeholds with attractive ground rents. This in turn allows freeholders to offer leaseholders cheaper lease extensions in return for an improved ground rent.

Leaseholders are continually bombarded with complex statutory lease extension information. It’s time that leaseholders are made aware of all the options that are available to them and not solely those dictated to them by solicitors and surveyors who may be prejudiced against non-statutory offers.

A lease extension need not be a victory for one side but a fair and profitable outcome for all.

Colin Horton is Asset Manager at Pier Management