Almost all leaseholders have the right to extend their lease under the 1993 Leasehold Reform Act, the main qualification being that you must have owned the flat for a period of 2 years or more. There is a process that you must follow and strict timescales to be followed by both sides (see below).
Marriage Fees (The 80 year trap)
You should extend your lease at the earliest possible opportunity, the longer you leave it, the more expensive it will be, with a possibly significant increase once the remaining term reaches 80 years, at which point an additional ‘Marriage Fee’ is payable on top of all the other costs:
When a lease is extended it usually adds value to the property, in some cases this can be a substantial increase. When you extend a lease that has less than 80 years to run, the landlord is entitled to half the increase in the value of the property, this is known as a Marriage value or Marriage fee, so-called because the value of the property + longer lease (i.e. when Married together) exceed the combined value of the separate entities. The marriage fee is an estimated value provided by your valuer/surveyor and it's part of the Premium (offer) that you make to the landlord to purchase the lease extension.
Marriage fees are only applicable to leases that have less than 80 years left to run, you should always look to renew a lease before it hits the 80 year mark for this reason.
Formal vs Informal
Even though you have the legal (formal) right to extend your lease under the 1993 Act, it doesn't follow that you should use it. A simpler and perhaps quicker method of extending would be to contact your landlord directly and sound him out on the prospect of extending the lease to ~125 years (125 is the minimum you should go for to give yourself peace of mind and still have 100+ years remaining on the lease when you come to sell). An informal arrangement such as this could be a good option for people who have recently acquired their properties, because there is no 2-year ownership delay, as there would be with an extension under the 1993 Act. A reasonable landlord, since he knows that he can be forced to extend after 2 years, should be willing to discuss an informal agreement.
When approaching a landlord direct, there's a fair chance you'll be given an inflated quote for your lease renewal and your negotiation skills will be tested. It may even be worth making your approach via a solicitor for this reason. Personally, I would persist with the informal method for just a month or two. If the landlord is slow to respond or otherwise inflexible, cut your losses and go for the formal lease renewal procedure described below, where there is less to negotiate and the landlord has to respond within defined timescales.
A word about ground rent (GR) at this point, although GR is usually a 'token' annual payment to the freeholder, one of the drawbacks of an informal arrangement to extend a lease, is that the freeholder will want to keep or maybe even increase the GR. A point to note however is that if you extend the lease formally, under the 1993 Act, one benefit is that the GR is reduced to £0 for the remaining term of the lease, known as a 'Peppercorn' rent- a good selling point for the property and one less thing for you (and any future owner) to worry about.
Lease Extension procedure under the 1993 Leasehold reform Act.
The 1993 Leasehold Reform Act gives you the right to extend your lease for an additional 90 years (i.e. the current term + 90 years) at a peppercorn ground rent, i.e. no ground rent payable for the remaining term of the lease. The main qualifying criteria is that you must have owned the property for more than 2 years, and you must have a ‘long lease’ i.e. one originally granted for 21 years or more.
The first stage in the lease extension process is for you to serve a Section 42 Notice on the landlord, which is basically an opening offer for the extension of the lease; but we are getting ahead of ourselves here; there is quite a bit of preparation needed before that point. And anyway it’s more likely that your solicitor will end up prepping the Sec. 42 Notice on your behalf.
First you need to get hold of your lease (document) and a get ballpark figure for the cost of the extension, try this Lease Extension Calculator to get the baseline cost, but be aware that you need to add legal fees to this figure and that you are liable for your landlord's legal costs as well as your own, e.g. your landlord will probably engage a surveyor to value the property and a solicitor to draw up the new lease. Those costs must be 'reasonable', but the bills will be coming to you. If you add £1500 - £2000 to the baseline cost provided by the lease extension calculator (above) you will get an estimated figure for your lease extension. You will get a better valuation in due course, but at this stage, think about how you’re going to get the money together. You may be able to add it to your mortgage on the basis that a longer lease will add value to your property.
Now that you have some idea of what you're letting yourself in for, you'll need to find a solicitor experienced in leasehold legislation (a.k.a A Leasehold Practitioner) and someone to value your flat (the solicitor will probably have contacts). A valuer is required to calculate the opening offer (Premium) that you make to your landlord, the Premium is a calculation based on what the landlord stands to ‘lose’ if the lease extension is granted.
You also need to find who the ‘competent landlord’ is, i.e. the person capable of granting you the lease extension. It’s likely to be the landlord specified on your ground rent demands. But there may be other intermediate leases between you and the landlord or other complicatiions. The competent landlord is the person to whom you’ll send the Section 42 Notice.
With the above information, your solicitor will be able to prepare the Section 42 Notice and send it to the competent landlord. Your lease extension is officially underway!
Landlord's Counter Notice
The landlord has 2 months to respond to the Section 42 Notice, but will possibly get in touch with you before then, either to request more information or to ask for access to the flat to do his own valuation. Any correspondence must be responded to within 21 days and that applies to both sides.
A point to note here is that your Landlord may not entirely welcome the application to extend your lease, particularly if you are ahead of the game; from a landlords' point of view, leasehold extensions are far more profitable on leases with less than 80 years to run i.e. where the landlord is entitled to receive a marriage value (fee) as part of the lease extension premium. While it's unlikely that your landlord will indulge in any skullduggery in this regard, you should be aware that he will thoroughly scrutinise any application where no marriage fee is involved and look for grounds to delay or object to it - your Section 42 Notice needs to be watertight.
The landlord will reply to the Section 42 with a Counter Notice, the most likely outcome is that he will acknowledge your right to extend, but disagree with the Premium on offer, asking for a figure 30-50% higher. The usual property ‘horse trading’ will ensue, with (hopefully) a compromise being reached within a ~few weeks.
Setting the Premium
If you can’t agree a mutually acceptable Premium (price) for the lease extension within 2 months, both sides have the option to refer the matter to a Leasehold Valuation Tribunal (LVT), effectively a property ‘Court’ consisting of independent solicitors/valuers/laypeople who will come to a decision on the Premium payable for the extension, it’s possible to appeal an LVT judgement, but assuming you don’t, the judgement becomes effective within 28 days, the landlord must then provide a new draft lease within 21 days.
Once an agreement between leaseholder and landlord has been reached, either independently or via the LVT, both parties must enter into the new lease agreement within 2 months.