8.1 Informal Lease Extension Procedure

Edited by Ashley Connell

Leasehold Enfranchisement Solicitor at Hetts

Informal Lease Extensions: A Professional Guide for Solicitors and Valuers

Introduction

Informal lease extensions, also known as voluntary extensions, represent a negotiated agreement between the freeholder (landlord) and the leaseholder (tenant) to extend the term of a leasehold flat without invoking the statutory framework under the Leasehold Reform, Housing and Urban Development Act 1993 (as amended). This route offers a flexible alternative to the formal process, allowing parties to tailor terms to their specific circumstances. For solicitors and valuers acting for either side, understanding the nuances of this approach is essential, particularly given the potential for landlords to secure advantageous outcomes, such as higher premiums and the incorporation of updated lease provisions that better protect their reversionary interests.

In the wake of the Leasehold and Freehold Reform Act 2024, which has extended statutory leases to 990 years and eliminated marriage value in formal claims, the informal route remains relevant for its speed and adaptability. However, it demands careful navigation to mitigate risks, especially for tenants who may face less favourable terms without statutory safeguards.

The Informal Lease Extension Process: Step-by-Step Guidance

The process for an informal extension is inherently unstructured, relying on mutual agreement rather than prescribed timelines. This can expedite matters when parties are cooperative but introduces uncertainty if negotiations stall.

1. Initiation and Initial Contact: The leaseholder typically approaches the freeholder, often via a managing agent, with a proposal to extend the lease. Alternatively, the freeholder may initiate discussions, particularly if aware of a short lease impacting marketability. Solicitors should advise clients to use a formal letter of enquiry to outline desired terms, such as extension length and proposed premium, while requesting a response within a reasonable period (e.g., 28 days). No ownership qualification period applies, unlike the statutory route's former two-year requirement (abolished in 2025).
2. Valuation and Negotiation: A Royal Institution of Chartered Surveyors (RICS)-qualified valuer should be instructed early to assess the premium. Unlike statutory valuations, which follow a formulaic approach (diminution in landlord's interest plus marriage value where applicable), informal valuations are market-driven and negotiable. Valuers acting for landlords can leverage this to advocate for higher premiums, reflecting the full commercial value of the extension and any new terms introduced. Negotiations cover extension length (e.g., 99, 125, or even shorter periods), ground rent adjustments (subject to the Leasehold Reform (Ground Rent) Act 2022, which imposes strict limits on new ground rents but allows retention or modification in certain structures, see dedicated section below), and other modifications. Fees for quotes may range from £100 to £1,000 plus VAT, and valuers should warn of the risk of the lease falling below 80 years during talks, potentially increasing costs via marriage value.
3. Legal Drafting and Review: Once terms are agreed in principle, solicitors are not usually appointed until an agreement has been reached, but can be instructed earlier if advice is needed on complex issues such as ground rent modifications or potential tax implications. Solicitors then draft a deed of variation, a grant of a new reversionary or concurrent lease, or other appropriate documentation. For tenants, thorough review is crucial to identify any "modernisations" that favour the landlord, such as new fees for consents or subletting. Landlords' solicitors can use this stage to introduce protective clauses, enhancing the lease's long-term value. If the property is mortgaged, lender consent is required, potentially incurring additional fees and delays, unlike statutory extensions.
4. Completion and Registration: Exchange and completion follow standard conveyancing practices, with the leaseholder providing proof of funds. The new lease, variation, or other deed must be registered at HM Land Registry. The entire process can take 1-6 months if smooth, but solicitors should prepare clients for potential withdrawals by the freeholder at any stage.

Valuers and solicitors should collaborate closely, ensuring valuations inform negotiations and legal terms align with commercial realities.

Advantages and Disadvantages: A Balanced Yet Landlord-Favourable Perspective

The informal route's flexibility often tilts in favour of landlords, who can command higher premiums and reshape lease terms to align with contemporary market standards, thereby maximising returns and minimising future liabilities.

For Landlords (Freeholders)

• Advantages: Greater control allows for premiums exceeding statutory calculations, as there is no obligation to split marriage value or adhere to a formula. New terms can be introduced, such as updated service charge provisions or restrictions on alterations, protecting the reversion. The ability to retain or even enhance existing ground rents through careful structuring (see ground rent section) provides ongoing income streams, and refusal or withdrawal rights preserve strategic options. In cooperative scenarios, this can foster positive tenant relations while securing financial gains.
• Disadvantages: Risk of protracted negotiations leading to statutory claims, where control is lost. Potential for lower uptake if terms are perceived as overly aggressive.

For Tenants (Leaseholders)

• Advantages: Potential for quicker resolution and lower upfront costs if the freeholder is amenable, with flexible extension lengths (e.g., 20-30 years for short-term needs like remortgaging). No two-year ownership barrier, and possible negotiation of favourable adjustments like reduced ground rent.
• Disadvantages: Lack of protections means higher premiums, unfavourable terms, and no guarantee of completion. Freeholders may impose new charges or retain escalating ground rents, impacting resale value and mortgageability. Delays could trigger marriage value if the lease dips below 80 years.

Overall, landlords frequently achieve superior outcomes through this route, underscoring the importance for tenant representatives to advise caution and consider statutory alternatives.

Valuation Considerations for Informal Extensions

Valuation in informal extensions lacks the statutory formula's rigidity, relying instead on market evidence and negotiation. RICS valuers must assess:

• Diminution in Freeholder's Interest: The loss of future ground rent and reversion value.
• Uplift in Leasehold Value: The increase in the flat's marketability post-extension.
• Comparable Evidence: Recent sales of similar properties with extended leases.

Premiums are often higher than statutory equivalents, as freeholders can demand full compensation without sharing marriage value. Valuers for landlords should emphasise this to justify elevated figures, while tenant valuers might use statutory benchmarks as leverage. Fees typically range from £600-£900, and dual valuations (informal vs. statutory) can aid negotiations. Post-2024 Act, valuers should note how statutory reforms might influence informal bargaining power.

Legal and Contractual Aspects

Informal extensions are governed by contract law, not statute, so enforceability hinges on clear agreements. Solicitors must scrutinise drafts for onerous clauses, such as new consent fees or ground rent reviews. A deed of variation is common for minor changes, but extending the term will trigger a deemed surrender and regrant, with significant implications for ground rent (see below). Alternatively, structures like reversionary or concurrent leases may be used to avoid this. No specific case law dominates, as disputes fall under general contract principles; however, solicitors should reference precedents like those on lease variations to argue fairness. Registration is mandatory, and failure can invalidate the extension.

Changes to Ground Rent in Informal Extensions

The Leasehold Reform (Ground Rent) Act 2022, effective from 30 June 2022 (1 April 2023 for retirement properties), prohibits ground rents exceeding a peppercorn (zero financial value) in most new long residential leases, including those arising from variations that trigger a deemed surrender and regrant. In informal extensions, extending the term via a deed of variation is invariably treated as a deemed surrender and regrant under common law, creating a new lease subject to the Act. Consequently, the entire extended lease must carry only a peppercorn rent, eliminating any existing ground rent from the date of completion. This can disadvantage landlords by prematurely ending their ground rent income stream.

Including a ground rent above peppercorn in such an extension deed exposes the landlord to serious consequences, including enforcement action by trading standards authorities and fines ranging from £500 to £30,000 per lease for demanding or receiving a prohibited rent. Repeated breaches may attract higher penalties, and leaseholders can recover any prohibited payments plus interest via the First-tier Tribunal. Landlords must therefore ensure compliance to avoid financial and reputational risks.

To circumvent these restrictions while favouring landlords' interests, a two-deed structure can be employed. First, execute a separate deed of variation to modify the ground rent in the existing lease (e.g., retaining, escalating, or increasing it), as alterations to rent provisions alone do not typically trigger surrender and regrant and are not caught by the Act since the lease remains "existing." Second, grant a new reversionary lease (commencing after the existing lease expires) or concurrent lease for the extension period, which, as a new lease, must incorporate a peppercorn rent to comply with the Act. This approach allows landlords to preserve or enhance ground rent revenue for the remaining original term while providing the desired extension, often as part of a negotiated premium. Solicitors should advise on the precise drafting to ensure the deeds are independent and avoid unintended surrender, and valuers should factor in the retained ground rent's capitalised value when calculating premiums.

This strategy underscores the informal route's appeal for landlords, enabling them to optimise income without statutory constraints on ground rent modifications.

Common Pitfalls, Best Practices, and Recent Developments

Pitfalls: Freeholder withdrawals after incurred costs; unfavourable ground rent escalators; lender delays; and valuation shifts if negotiations prolong. Short extensions may offer poor value long-term. Inadvertently triggering surrender and regrant without peppercorn compliance can lead to fines.

Best Practices: Secure heads of terms early; instruct specialists; compare with statutory options; and fix valuation dates to avoid marriage value. For landlords, use the process to modernise leases profitably, including ground rent enhancements via two-deed structures.

The 2024 Act's reforms bolster statutory rights but preserve the informal route's utility for bespoke arrangements, particularly where landlords seek to optimise premiums and terms. Professionals should stay abreast of evolving guidance from bodies like RICS and LEASE.