Voluntary Lease Extensions

What is a voluntary lease extension and when might one be appropriate?

A voluntary lease extension, also known as an informal lease extension, is the process of negotiation between the landlord (often the freeholder) and leaseholder (tenant) whereby additional years are added to the current lease by agreement.

Many mortgage lenders are reluctant to lend against properties where there is less than 70 years remaining on the lease. If the lease falls below 60 years most lenders will not lend at all. Essentially, a short lease can make a property difficult to mortgage or sell. It is therefore usually necessary for a short lease to be extended at the same time as the sale or mortgaging the property. A potential purchaser may even insist the purchase is conditional on the lease being extended.

A voluntary lease extension can be set up to complete simultaneously with the sale of a property so the sale proceeds can be utilised to pay for the lease extension. This may be especially helpful where the premium is high as the leaseholder will not need to try and find a large sum of money at short notice.

How do Voluntary Lease Extensions work?

Quite simply, a voluntary lease extension usually entails the leaseholder approaching the landlord or their representative to ask for the terms they would be willing to proceed with the lease extension on.

The landlord will usually obtain a valuation of the property at the leaseholder’s expense to ascertain the premium that should be payable. Whilst it is not necessary, it is a good idea for the leaseholder to obtain their own valuation advice to determine whether the premium offered is reasonable. Once terms have been agreed, the parties’ respective solicitors will try to agree the form of the new lease.

Differences between statutory and voluntary lease extensions

Statutory Lease Extensions

• Statutory lease extensions are governed by the Leasehold Reform, Housing and Urban Development Act 1993
• A leaseholder must have owned the property for 2 years or more to be eligible to claim a statutory right to a lease extension
• To commence a claim the leaseholder must serve a statutory notice and the landlord has no choice but to agree to the lease extension if the qualifying criteria have been met
• Governing legislation sets out the terms that a leaseholder is entitled to; an additional 90 years to the remaining term, at a peppercorn ground rent (no payment in practice)
• Statutory lease extensions are subject to strict timetables and can often be a lengthy process, especially where terms cannot be agreed between the parties.

Voluntary Lease Extensions

• Voluntary lease extensions are made by agreement between the parties
• There is no eligibility requirement – leaseholders can proceed with a voluntary lease extension without having owned the property for 2 years or more
• There is no need to serve a statutory notice to commence a claim but the landlord can amend the terms or withdraw their agreement completely at any time
• The landlord is free to propose any terms they wish and it is up to the leaseholder to decide whether they accept them.  The introduction of the Leasehold Reform (Ground Rent) Act 2022 means the ground rent would now be reduced to a peppercorn (no rent in practice) even where terms are agreed voluntarily. However, the landlord can continue to charge the current ground rent (if any) until the end of the current lease term, any additional years granted would then be at a peppercorn
• Voluntary lease extensions can usually progress much quicker with the cooperation of all parties involved (however, they are subject to the lender’s consent if there is a mortgage on the property which may delay matters).

Owning a share of the freehold

Where a leaseholder owns a share of the freehold, it is usually a good idea to progress a voluntary lease extension with the agreement of the co-freeholders. These lease extensions are usually on the basis of favourable terms (i.e. 999 years at a peppercorn ground rent with no premium payable). There would be no eligibility requirements and they can usually be progressed to completion quickly. A long lease term such as this would be extremely attractive to a potential buyer in the event the leaseholder decided to sell.