Do you own residential leasehold property? If you’re the owner of a flat with a short(ish) lease, it is in your financial interest to have at least a reasonable understanding of lease extensions so that you can take advantage of your statutory rights and protect your investment.
But let’s start at the beginning.
Your leasehold property is a depreciating asset
When you buy property on a leasehold basis, you are not acquiring the building or land it is standing on. Rather, you are purchasing the right to occupy the property for a set period of time, as per the remaining years left on the lease, from the freeholder.
While new leases are typically issued with 99 years, 125 years or even 999 years, the time left when you acquire the property may be considerably shorter. The fewer years left on the lease, the lower the value of your home. In theory, when the lease expires, the property reverts back to the freeholder – though this rarely happens in practice.
Long leases have little effect on the value of the property, but when the lease approaches 80 years, things can change rapidly.
Short lease properties are hard to mortgage/sell
Not enough leaseholders are aware that 80 years is the ‘magic number’ for lease extensions. Try to sell or remortgage a flat with < 80 years left on the lease and you will soon encounter problems. Many mortgage lenders will flatly refuse to lend on short lease properties or, at best, offer prohibitive rates to protect their risk. If you are selling a flat with a short lease, your market will be limited to cash buyers only.
The reason can be found in Schedule 13, Part II of the Leasehold Reform, Housing and Urban Development Act 1993 (the Act) which stipulates that lease extensions for properties with unexpired lease terms of less than 80 years attract a ‘marriage value’. This is best defined as the increase in the value of the property arising from the leasehold and freehold interests being combined. As the remaining lease runs down, the marriage value goes up, as a result of which the cost of your lease extension can become very expensive very quickly.
You have a statutory right to extend your lease
The Act made provisions for statutory lease extensions, giving property owners the right to extend their existing lease by 90 years and reduce ground rent to zero. The legal process must follow a set procedure that is explained in more detail here, while a mutually acceptable premium is payable to the freeholder.
You can use your statutory lease extension right at any time, though in order to qualify you must have owned the property for a minimum of 2 years. This is important information if you are looking to buy a leasehold property, as it may be possible to request that the seller initiates the lease extension process and transfers the benefit upon completion of the sale, enabling the buyer to circumvent the 2-year wait.
If you don’t qualify for a statutory lease extension, you could of course approach the freeholder direct at any time and negotiate a private and legally binding agreement outside of the statutory process. However, since any such agreement won’t be bound by the rules and regulations set down in the Leasehold Reform Act 1993, caution is highly advised and legal advice should most definitely be sought.
Take specialist advice from a surveyor and solicitor
Under the terms of the Act, you have a right to extend the lease by 90 years and reduce ground rent to a peppercorn. When it comes to negotiating a realistic premium with the freeholder, a lease extension survey will form the basis of your position, while your solicitor can serve a Section 42 Notice on your landlord according to the Act. To get an idea of the approximate cost of extending the lease of your property right now, use our handy Lease Extension Calculator.
At South East Leasehold, we help 200-300 leaseholders per year to extend their leases. The process is often long and complicated and involves both valuation and legal work. Representation by experienced solicitors and Chartered Surveyors is essential if you would like to obtain the best premium and avoid unnecessary costs. We are the only company in the UK that can provide both services under one roof.