One of the downsides of being a shared owner is that you don’t have a legal right to lease extension (known as the ‘formal route’). Does it matter? In this feature, Linz Darlington, MD of Homehold, explains what you need to know when it comes to formal v informal lease extensions.
If you have a shared ownership flat in England or Wales, it is on a leasehold basis. Historically, many shared ownership flats were sold with 99-year or 125-year leases. And, as the lease gets shorter, your flat will get less valuable and harder to sell or mortgage.
As a result, you may well want to extend your lease.
Lease extension: the two options
There are two routes to getting a lease extension:
- The formal route
- The informal route
The formal route involves using your statutory right to a lease extension under the Leasehold Reform Housing and Urban Development Act 1993. But to do so – in practice – you need to have staircased your flat to 100%.
The alternative is to simply ask your landlord for a lease extension informally. They don’t have to say yes, but they often will. Even if you don’t own 100% of your flat, your landlord might be happy to extend your lease.
Formal v informal – does it matter?
This article first discusses your statutory right to a lease extension – because this helps to frame the pros and cons of both options.
It then looks at why an informal lease extension might sometimes be a better option and, finally, how to choose the route that is right for you.
The statutory right to lease extension
A very long lease
With a formal lease extension, you are entitled to an extra 90 years on top of whatever you have now. For example, if you currently have 86 years remaining, a statutory lease extension would give you 176 years. A 90-year statutory extension means that you’re going to have a very long lease. You won’t need to extend the lease again or be worried about a short lease affecting the value of your flat – even if you keep it for the rest of your life.
But, with an informal lease extension, your landlord might simply put your lease back up to the original lease length – 99 years or 125 years.
No ground rent
With a statutory lease extension, your ground rent will be set to £0 for the entire term. If you have a high ground rent at the moment, this will be set to £0 for the rest of the term. Your ground rent can’t be increased. (In the past, shared ownership homes were frequently sold with a ‘peppercorn’ ground rent – i.e. £0. But at least some shared ownership homes now come with ground rent charges.)
Historically landlords used informal lease extensions as an opportunity to ramp up your ground rent. Since the Leasehold Reform (Ground Rent) Act 2022, they can’t do this now. All they can do is keep the ground rent the same for your existing lease term and set it to £0 for the extension period. Say you had 50 years remaining, and your landlord extended your lease back up to 99 years – you would pay the same ground rent for 50 years, and £0 ground rent for the remaining 49 years.
No changes to your lease
Under the legislation, there is very, very limited scope for your freeholder to make changes to your lease with a statutory lease extension.
However, this doesn’t apply to informal lease extension, where a landlord can take the opportunity to “modernise” your lease. This usually means introducing new charges or restrictions that benefit them and not you.
(Sometimes) less legal work
A statutory lease extension is usually done through a short document which essentially extends your existing lease and removes the ground rent.
In addition, the way the legislation is written means that you don’t need to seek the consent of your mortgage company to do the lease extension. Getting such consent is often time consuming, and your lender will often take a fee to grant consent.
On the contrary, with an informal lease extension, your solicitor may be presented with a modern lease – which is tens of pages long. They’ll need to review this with a fine toothcomb to make sure that it gives you the same rights and benefits as your existing lease and doesn’t include any disadvantageous charges. Your lender will need to sign off on this too.
Time limits
Under a statutory lease extension, the parties must respond or complete actions by certain times. While these timelines are fairly generous, it does mean that the landlord (or their sluggish representatives) can’t drag things out indefinitely.
There are no equivalent deadlines in an informal lease extension process.
Fair price
Finally, with a statutory lease extension your valuer will advise you on what they think that you should pay for your lease extension and your solicitor will make an initial offer.
During the process your valuer will negotiate with your landlord’s valuer to achieve a fair price and if one can’t be reached, the option of going to the First Tier Tribunal is available to you. Tribunal is rarely required, but the threat is what gets your landlord to the negotiating table!
In contrast, with an informal lease extension, it is much more a “take it or leave it” price.
What are the benefits of an informal lease extension?
The (potential) benefits of an informal lease extension are borne out of two of the (potential) downsides of the statutory lease extension.
It might save professional fees
With an informal lease extension, you don’t really have a chance to negotiate the price – so you don’t need to get your own valuation or pay someone to negotiate. This will save you some money on professional fees. Usually, the landlord will instruct a valuer to do a valuation at your expense and present you with the price. Equally, with an informal lease extension your solicitor won’t need to serve a notice, so there might be a small saving on legal fees there.
However, you also don’t get to negotiate the price of the lease extension premium – so it is hard to know whether the reduction in professional fees will lead to an overall lower cost.
Our experience is that while many housing associations are fairly reasonable on the price they want for the lease extension, there is still room for negotiation.
A recent commenter on this website mentioned:
“Their valuer valued the flat 20% higher then the price we paid at the beginning of 2023. We found the comparison properties they provided were very different then ours.
‘Shared Ownership Valuation: Buying and Selling’ (comments)
With an informal lease extension there is limited room for negotiation. The same comment said:
“We have tried twice now to contest the valuation with no effect. They are 100% confident the value is good and refuse to amend.”
‘Shared Ownership Valuation: Buying and Selling’ (comments)
Certainly, in this case, it seems like the commenter would have achieved a better price overall if they had gone down the statutory route.
It might be quicker
With an informal lease extension, the process can be slightly condensed. You don’t need to serve a notice on your landlord or wait for their counteroffer.
Equally, often chipping the landlord down on the price is one of the things that takes the time with a lease extension – and cutting this out can save some time too.
However, the flip side of this is that with an informal lease extension, your landlord doesn’t have any deadlines to work to – and they can really drag things out.
Formal v informal – which should I choose?
A common misconception is that the best approach is to start a lease extension informally and consider the landlord’s terms before deciding the best option.
This doesn’t usually work in practice, because the landlord will charge you for a valuation before giving you a price. Even if you’re happy with the price, they will charge you for the legal work before they provide your solicitor with a draft lease. This means you could have invested heavily in the process before you fully understand the terms.
With private landlords, the potential upsides of an informal lease extension are almost always counteracted by the disadvantages.
This isn’t so clear cut with public sector landlords – who, at least in theory, are committed to treating leaseholders fairly. We have heard of some reasonable deals that have been reached informally, with a saving on time and professional fees.
If you want to do a statutory lease extension, please have a look at the Homehold website – we offer a start-to-finish service including both lease extension solicitors and surveyors . (Remember you need to staircase to 100% to undertake a statutory lease extension).
For informal lease extensions, we recommend speaking with Zarah Aulllybocus at Nexa Law, who is a solicitor with extensive experience working with housing associations.
If you have building safety issues and are considering a lease extension, please read Zahrah’s feature – Building Safety Act: Update for shared owners.
Featured image: rawpixel.com, Freepik
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