Formal vs. Informal Lease Extensions
There are two routes a leaseholder can take to extend their residential lease. Each route has it's own advantages and disadvantages, but the general consensus is that the formal (statutory route) is the preferred option. However this is not always the case, as the best route for each scenario is very subjective.
Differences Between Formal and Informal Lease Extensions
With formal lease extensions, the leaseholder serves a notice on the landlord putting forward an offer to extend their lease by the statutory 90 years with no future ground rent. After negotiations, the leaseholder and tenant reach an agreement on the premium (amount payable to the landlord).
With informal lease extensions, the leaseholder normally approaches the landlord on an informal basis and agrees a premium without serving a statutory notice. The agreed terms usually differ in that the number of added years is less (than +90) and commonly the ground rent remains, or even increases.
Formal Lease Extension Advantages
- You are guaranteed +90 years and no further ground rent.
- The agreed premium is usually better value for money
- The term remaining on the lease is 'frozen' immediately upon commencing the formal route, meaning that the premium no longer increases as the term decreases. Each day counts.
- A landlord may insist only on proceeding with a formal statutory notice.
Informal Lease Extension Advantages
- You are not required to own the property for at least two years.
- Legal fees will be slightly cheaper (albeit only the cost of serving a section 42 notice - £220 on average)
- If a formal lease extension is unaffordable then accepting a lower additional term (for example +40 years rather than +90) and keeping the ground rent in place, will result in a lower premium. However there's a catch - the lease will need to be extended again sooner - the lower premium won't usually make up for this, nor continued ground rent payments.
- When approaching a landlord on an informal basis - the most likely scenario is that the landlord will request a payment to cover admintistration and valuation costs to enable the landlord to instruct a professional to calculate the premiumm. It is highly likely that the landlord's offered premium will be substantially inflated, resulting in the leaseholder having no alternative but to commence the formal route from scratch.
Which Route Is Best?
If you have owned the property for a period of at least two years, we strongly recommend that you commence matters through the formal route. Always instruct a professional to carry out a valuation and serve the notice. Once you have commenced the formal route, it is still possible to reach an informal agreement (deviating from the standard +90 years and nil ground rent) at any stage of the process. By serving the notice,
If you have not owned the property for at least two years AND the remaining term is less than 82 years - the informal approach would be preferable.
Commencing the formal route
Instruct a professional to start the lease extension process by preparing a valuation and serving a section 42 notice.