At The Lease Extension Company, we often advocate for you to take the statutory legal route to your lease extension. However, the alternative path is an informal offer, agreed directly between the leaseholder and freeholder.
An informal lease extension is not necessarily a poor choice, but there are some things to be cautious of before heading down this route.
Let’s examine the pros and cons of informal lease extensions, what to look out for, and whether this is the best course of action for you.
Informal vs Formal Lease Extension
First things first, it’s worthwhile to outline the difference between a formal (statutory) and an informal (direct) lease extension.
For more details, see each step of the procedure in our ‘How Long will my Lease Extension Take?’ article.
The Formal (Statutory) Route
The formal lease extension process is set out within the Leasehold Reform, Housing and Urban Development Act 1993.
It involves the leaseholder serving a Section 42 notice to their freeholder outlining their legal right to a lease extension.
From this point onwards, you will have entered into a legally binding procedure that protects your leaseholder rights.
The formal route also entitles you to the following perks.
- Each process stage has an allotted time frame to avoid unnecessary delays from the freeholder.
- Once the Section 42 notice is served, the term remaining on the lease is frozen, meaning the premium will no longer increase as the term decreases.
- A professional valuation means the freeholder cannot simply ‘name their price’.
- Your ground rent will be eliminated, set to no more than a ‘peppercorn’ rate (zero).
The Informal (Direct) Route
An informal lease extension is not dictated by a legal procedure.
Instead, leaseholders negotiate the terms of the premium and lease length with the freeholder. This process is sorted either directly or through a solicitor.
The Pros and Cons of an Informal Lease Extension
The Pros of an Informal Lease Extension
Informal lease extensions have three main benefits that can make them seem appealing.
✓ A quicker process
A direct lease extension seems quicker to complete as it cuts out much of the legal back and forth.
✓ Lenient eligibility criteria
Unlike the statutory route, you don’t have to own your property for at least two years to qualify for an informal lease extension.
✓ Fewer expenses
An informal lease extension can appear cheaper than a statutory one, as your freeholder might offer you a lower premium.
You could also negotiate a shorter lease extension, such as adding 40 years to your lease rather than 90 years. Hopefully, this would mean you pay less.
Since the direct route is often shorter, you might also save on professional solicitor fees.
The Cons of an Informal Lease Extension
There are some significant drawbacks of informal lease extensions, be aware of them before proceeding with this route.
✘ Your freeholder can retain your ground rent, although they can’t add more.
A perk of extending your lease via the statutory route is that you can eliminate your ground rent.
An informal lease extension does not guarantee this advantage since the freeholder is not legally obligated to provide it.
✘ Your freeholder may charge for a quote.
An old trick in the book is for freeholders to charge leaseholders for a lease extension quote. This initial fee could range anywhere from £100 to £1,000+VAT.
The freeholder will chance a high quote, hoping leaseholders will proceed since they have already invested money.
Some freeholders will add time limits to their offers, pressuring leaseholders to comply.
✘ Your freeholder could change the lease terms once you have committed to the process.
With an informal lease extension, the freeholder is perfectly entitled to add ‘modernisations’ to your lease terms once you’ve already committed to the procedure.
These changes usually benefit the freeholder rather than the leaseholder. They can dictate lettings, remortgaging, selling and even keeping pets.
These last-minute changes simply can’t be made within a statutory lease extension.
✘ An informal lease extension is not always as quick as perceived.
Unlike the statutory route, an informal lease extension does not have to stick to deadlines.
Therefore the freeholder can press pause when they feel like it or ignore your requests outright, as there is no legal obligation for them to complete the process.
Equally, when you opt for an informal lease extension, you must gain the consent of your mortgage lender, which can be costly and slow down the process. On the other hand, a statutory lease extension does not require approval from your lender.
✘ There can be extra legal work.
An informal agreement often involves analysing a whole new lease. This lengthy document needs to be sifted through by a professional to ensure you’re not signing off on any undesirable terms.
On the other hand, a statutory lease extension usually arrives as a short, simple document which is quick and easy for your solicitor to review.
When to Proceed with an Informal Lease Extension
Even though there are several things to remain cautious about when considering an informal lease, there are some instances where it may be preferable.
For example, an informal extension would be a reasonable option if you want to extend your lease and have not owned your property for more than two years.
However, If you have owned the property for at least two years, we strongly recommend taking the legally backed, formal route.
Only the statutory route protects your leaseholder rights, regulated by the terms of the Leasehold Reform, Housing and Urban Development Act 1993.
Speak with a Lease Extension Specialist Today
If you’re struggling to decide which route is best, please get in touch for a free initial chat with The Lease Extension Company.
Arrange an appointment with our team of specialist lease extension experts and solicitors. We’ll help you identify the best route for you and your circumstances before you invest time and funds into this procedure.
Simply fill out our online contact form, send us an e-mail via [email protected] or call us for free on 0800 098 2770.