Lease Extension Valuation

The process of extending a lease is governed by the Leasehold Reform, Housing and Urban Development Act 1993. The Act provides qualifying leaseholders with the legal right to extend their lease by 90 years beyond the remaining term, and to reduce the ground rent to zero. The Act sets out the process for determining the premium payable to the freeholder for the lease extension. Once a leaseholder has obtained a valuation report from a qualified chartered surveyor, they can serve a notice of claim on the freeholder, known as a Section 42 Notice, to initiate the lease extension process. The leaseholder and freeholder can then negotiate the terms of the lease extension and the premium. If an agreement for the premium cannot be reached, the dispute can be referred to the First-tier Tribunal (Property Chamber) for determination. Once the terms have been agreed upon, a new lease can be drafted and executed, and the lease extension is completed in accordance with the Act.

To be a qualifying leaseholder, you must meet the following criteria: You must have owned the property for the past 2 years. The lease must have had an original term of over 21 years when it was originally granted. Your Landlord is not a Charitable Housing Trust. The lease is not a business or commercial lease.

The Leasehold Reform Housing and Urban Development Act 1993 outlines the calculation for the lease extension premium to be the aggregate of: The decrease in value of the freeholder’s interest (the difference between the value of your landlord’s interest now with the current lease and the value of their interest after the new 90 year lease is granted). The increase in the value of the property, arising from the lease extension (known as ‘marriage value’ and shared equally between both parties). Compensation to the freeholder for reducing the ground rent to zero.

As a Leaseholder, the ideal time to extend your lease will depend on the length of the remaining lease term, the value of the property, and your personal circumstances. However, in general, it is recommended that you consider extending your lease sooner rather than later. This is because as the lease term decreases, the value of the property may also decrease, making it more difficult to sell or obtain a mortgage in the future. The cost of extending a lease can vary, but it typically increases as the remaining lease term decreases. Once your lease drops below 80 years, it becomes significantly more expensive to extend due to ‘marriage value’ which becomes payable to the freeholder.