1.3 Comparing Statutory and Informal Lease Extensions
In the realm of leasehold property management, the choice between pursuing a statutory lease extension under the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993) or opting for an informal arrangement with the freeholder is a decision fraught with implications for leaseholders, freeholders, and their respective advisers. This article delineates the principal distinctions between these two approaches, offering property lawyers, surveyors, and advisers a comprehensive framework to guide their clients through the complexities involved. By examining the statutory route's structured protections against the flexibility of informal negotiations, I aim to equip professionals with the insights necessary to recommend the most advantageous path, tailored to individual circumstances.
The LRHUDA 1993 provides a statutory entitlement for qualifying leaseholders of flats to extend their leases, ensuring a degree of certainty and fairness in an otherwise asymmetrical relationship. In contrast, informal extensions rely on mutual agreement, often allowing for bespoke terms but lacking the safeguards of legislation. As I navigate these options, it is essential to consider the current legislative landscape as of 16 August 2025, where the core mechanisms of the 1993 Act continue to govern statutory extensions.
Statutory Lease Extensions under LRHUDA 1993
Chapter II of the LRHUDA 1993 entitles qualifying tenants of flats to a new lease extending the existing term by 90 years, at a peppercorn ground rent. This right is available to leaseholders who hold a long lease, originally granted for more than 21 years, and who are not business tenants. There is no requirement for a minimum period of ownership prior to claiming this right, allowing leaseholders to proceed promptly after acquisition, subject to completion of Land Registry formalities.
The process is initiated by serving a section 42 notice on the competent landlord, proposing terms including the premium. The landlord may respond with a counter-notice under section 45, leading to negotiations or, if necessary, determination by the First-tier Tribunal (Property Chamber). The premium is calculated per Schedule 13, incorporating the diminution in the landlord's interest and, where the unexpired term is less than 80 years, 50 per cent of the marriage value.
For professionals, the statutory route offers predictability: terms are largely prescribed, with modifications limited to those permitted under section 57, such as addressing defects in the original lease. This framework minimises ambiguity, though it demands meticulous adherence to procedural timelines to avoid claim invalidation.
Informal Lease Extensions
Informal lease extensions, by their nature, operate outside the statutory regime, arising from direct negotiations between leaseholder and freeholder. Without the compulsion of legislation, these arrangements can be customised to suit both parties' preferences, potentially including variations in extension length, ground rent structures, or additional covenants.
The process typically begins with an informal offer from the leaseholder, followed by valuation discussions and legal drafting. There are no prescribed timelines or forms, affording flexibility but also introducing risks such as protracted negotiations or unequal bargaining power. Premiums are determined by market forces rather than statutory formulae, often reflecting comparable transactions but subject to the freeholder's willingness to engage.
In practice, informal extensions may appeal when a swift resolution is desired or when specific terms not available statutorily, such as a shorter extension to align with redevelopment plans, are sought. However, advisers must caution clients on the absence of tribunal recourse, leaving disputes to potentially costly litigation.
Key Differences
Eligibility and Qualification
Statutory extensions require strict compliance with section 39 criteria, including the lease's original term and the tenant's status. Exclusions apply to certain properties, such as those held by charitable trusts. Informal routes impose no such prerequisites; any leaseholder may negotiate, though success depends on the freeholder's cooperation.
Actionable insight: Surveyors should verify statutory eligibility early, as informal paths may serve as a fallback for non-qualifying leases, but with heightened due diligence on proposed terms.
Term of Extension and Ground Rent
Under LRHUDA 1993, the extension is fixed at 90 years added to the existing term, with ground rent reduced to a peppercorn. Informal agreements permit variability: extensions could be shorter or longer, and ground rents might remain or escalate, subject to negotiation.
This divergence is critical; statutory certainty protects against inflationary rents, whereas informal flexibility might suit short-term strategies but risks future burdens. Lawyers advising on informal deals should incorporate safeguards against onerous rent reviews.
Premium Calculation
Statutory premiums follow a formulaic approach under Schedule 13, balancing the landlord's loss with shared marriage value below 80 years. Assumptions exclude tenant improvements, ensuring fairness. Informal premiums, conversely, are negotiated, potentially lower if the freeholder seeks quick settlement but higher without statutory caps. Informal lease extensions can sometimes result in a higher premium as a result of the freeholder having the upper hand in negotiations, leveraging their position to demand more favourable terms.
Practical tip: In informal scenarios, leverage tribunal precedents to anchor negotiations, as freeholders may anticipate statutory claims as an alternative.
Process and Timelines
The statutory process is regimented: notices, counter-notices, and tribunal applications within six months if unresolved. Informal processes lack structure, potentially expediting agreements but risking delays from impasse. No automatic right to extension exists informally, unlike the statutory entitlement.
For advisers, the statutory route's timelines enforce discipline, while informal negotiations benefit from early surveyor input to inform offers.
Costs and Liabilities
Statutorily, tenants bear the landlord's reasonable valuation and legal costs under section 60, but not non-contentious fees if withdrawn early. Informal costs are negotiable, often shared or borne by the tenant, without statutory limits. There is also the risk of the leaseholder having to pay the valuation fee upfront, then receiving an offer from the freeholder that is too high with no willingness to negotiate, leading to the need for another valuation, and associated charges, due to the lapse of time if the leaseholder decides to pursue the statutory route instead.
Insight from experience: Informal deals can minimise costs through amicable terms, but statutory protections cap exposure in disputes.
Rights and Protections
Statutory extensions confer robust protections, including tribunal adjudication and safeguards against unreasonable terms. Informal arrangements rely on contract law, vulnerable to power imbalances without legislative backing.
Professionals must emphasise this: statutory routes empower leaseholders, particularly in adversarial relationships.
Advantages and Disadvantages
Statutory extensions provide security and enforceability, ideal for preserving asset value amid declining lease terms. Disadvantages include procedural rigidity and potential tribunal delays. Informal extensions offer speed and customisation, advantageous for cooperative freeholders, but risk unfavourable terms or failure to agree.
In buoyant markets, informal routes may yield concessions, yet statutory claims serve as leverage. Advisers should model scenarios, weighing premiums against long-term benefits.
Practical Considerations for Professionals
When counselling clients, assess the freeholder's disposition: amenable landlords favour informal paths, while contentious ones necessitate statutory action. Integrate tax advice, as premiums may attract stamp duty land tax.
Common pitfalls include underestimating informal risks, such as embedded rent increases eroding value. In multi-flat buildings, coordinate with collective enfranchisement considerations.
Although not always the case, professionals are usually best to advise clients to proceed through the statutory route where possible, unless the upfront fees of the informal route are low, which usually is not the case, with freeholders requesting usually £500 to £1250 for an initial valuation. If initial freeholder valuation fees are low and the freeholder has a trustworthy track record, then maybe informal is better.
Collaboration is key: joint valuations can bridge gaps, averting escalation. Ethical practice demands transparency on options, ensuring informed decisions.