Should I extend my lease now or wait for the change in the law?

Those sections of the Leasehold and Freehold Reform Act 2024 (passed in a hurry in the dying days of the last Government), which are aimed at simplifying and reducing the cost of obtaining an extended lease or freehold, are not yet in force.

Although the new government has stated its intention to bring into force these remaining provisions of the Act as soon as possible, further consultation is required, particularly regarding the valuation aspects. More importantly, several large landlords have challenged the legislation, (because it could quite significantly reduce the price you have pay them for an extended lease or to acquire the freehold).

Given this delay, it is understandable that many leaseholders are uncertain about whether to extend their leases. The decision to extend your lease or acquire your freehold depends on the specific circumstances of your lease and, in some cases, your personal situation, but the decision is usually easy to make. But the decision to delay making the application is a more difficult one and it involves several factors (see below).

The High Court has already decided that landlords do have an arguable case to challenge aspects of the legislation which would make the process cheaper for you, particularly:

• the removal of marriage value from enfranchisement calculations
• the cap on ground rent; and
• the removal of freeholders’ rights to recover reasonable legal and valuation costs incurred in ae claim.

The full case is due to be heard in the High Court this July and, because of the deep pockets of the landlords, it can be assumed that, if they lose in the High Court, the matter will be appealed in the Court of Appeal and even the Supreme Court after that. Some of us believe that the Government will end up having to compensate the landlords for the loss of their properties. This gives you an idea of the length of the delay which we could be talking about.

When considering the extension of your lease, various factors must be evaluated, primarily based on the remaining duration of the current lease. By way of example, there are three scenarios which might affect you:

1. My lease has an unexpired term of more than 80 years

If your lease has approximately 82 years remaining, it is advisable to extend it now.

The 2024 Act proposes eliminating a component known as marriage value from the premium calculation, which can substantially increase the premium payable.

A lease with an unexpired term exceeding 80 years does not however attract marriage value, and so there is less incentive to delay extending your lease in those circumstances.

If, on the other hand, the unexpired term of your lease significantly exceeds 80 years, you might consider waiting. Part of the reforms include removing the tenant’s obligation to contribute towards the landlord’s legal and valuation costs incurred in connection with the claim and so you might benefit from that change if you wait.

Furthermore, if your ground rent exceeds 0.1% of the property’s value, you could benefit from waiting as the legislation proposes capping ground rent to 0.1% of value in lease extension and enfranchisement calculations.

2. My lease has an unexpired term of 80 years or less but more than 40 years

While you might contemplate waiting due to the proposal to remove marriage value, considering the possibility of prolonged delays or non-implementation, it may be preferable to extend your lease now.

If the unexpired term of your lease becomes quite short, say 40 years, it might in fact prove more costly to extend later. The 2024 Act provides for the deferment and capitalisation rates used in the premium calculation to be prescribed by secondary legislation. Considering the challenge by landlords, that secondary legislation may still be some way off. It is also possible that setting these rates may result in premiums for lease extensions being equivalent to or higher than those before the reforms, despite the abolition of marriage value.

3. My lease has an unexpired term of less than 40 years

In these circumstances there is no obvious reason to wait.

Where the term of the lease is already quite short, and so less than 40 years, every year that you delay an extension of the lease is likely to increase the premium, even if marriage value is ultimately abolished. There is accordingly no reason to wait in these circumstances.

Other relevant circumstances

If you want to remortgage your property and the lender is worried about a short term, you should extend it.

The two-year ownership requirement has now been abolished which means that buyers can now extend the lease immediately upon being registered as the new owner, without waiting. Although the Land Registry is taking a long time to register new leases, they will agree to speed up the process where hardship can be shown. ‘Hardship’ includes having to wait to extend the lease, or if you wish to or sell your property with an extended lease or share of freehold.

It might well be advisable, particularly if your lease has around 40 years unexpired, to seek valuation advice on the best course of action. We can recommend a valuer to you with the requisite expertise to advise you.

As you can see from the above, the issues are complicated: There is no single answer for all situations that that says ‘Don’t delay’ or ‘Never rely upon someone else to make your bed for you’, but we can provide guidance to help you choose the best timing and the best option to suit your own circumstances.

If you have any questions regarding this subject please contact Katherine Simpson of the Residential Property team, or any member of the Property Litigation team.