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If you are the owner of a leasehold property, typically a flat or maisonette, take a look at the remaining length of the lease. This is important as there may come a time when it makes good financial sense to protect your investment by obtaining a lease extension.
The residential lease for your property was originally granted for a fixed number of years – usually between 99 and 250 years. When you bought your home, what you actually acquired was the right to occupy the property for the remaining lease term, and that figure decreases with every year. Technically, this makes the property more of a depreciating asset. As the lease runs down, the value of the property decreases until, ultimately, the lease term expires and ownership reverts back to the freeholder. Fortunately, this very rarely happens because leaseholders have the option to extend their lease in good time.
According to industry professionals, an unexpired term of 80 years or less is considered high risk and it is therefore recommended that you consider a lease extension well before that figure is reached. The reason is ‘marriage value’ – calculated as the difference in the property value before and after a lease extension at 80 years (or less) for which the freeholder is entitled to receive 50% compensation. This can make a lease extension disproportionately expensive.
A short-lease property can still be sold but it may be hard to mortgage or remortgage unless the lease is extended at the same time. One expert in the field advises that “approximately 60% of mortgage lenders won’t lend on properties with leases that have an unexpired term of 75 years or less,” restricting your market to cash buyers only.
There are two ways in which a lease extension on your property can be obtained:
Under the Leasehold Reform Housing and Urban Development Act 1993, leaseholders are granted the right to a 90-year lease extension on a flat or maisonette (50 years on a leasehold house). In order to qualify, you must have owned the property for 2+ years and meet various other eligibility criteria. This is an important consideration if you are planning to buy or sell a property with 80-90 years remaining.
You can approach the freeholder or the management agent directly with a request for a lease extension outside of the statutory framework at any point in time. There are no qualifying criteria to meet and both sides may benefit from greater flexibility in negotiations. Any agreements thus reached between leaseholder and freeholder carry the full force of the law, though you will not benefit from any statutory protection if you take this route.
Whichever lease extension path you choose, you will need to appoint a specialist surveyor and solicitor to help you navigate this potentially complex process and negotiate with the freeholder to get the best possible deal.
A statutory lease extension gives you the right to add 90 years to the existing unexpired lease term for a flat. If your lease has, say, 75 years remaining, you will be able to extend the term to 165 years remaining. Furthermore, any ground rent will be reduced to zero (‘a peppercorn rent’).
The premium payable to the landlord is calculated according to Schedule 13 of the Act. There’s a useful lease extension calculator here to help you get an idea of overall costs.
In order to qualify, you need to have owned the property for at least 2 years, though there are ways to get around this if you are thinking of buying a short-lease property. If the seller meets the 2-year ownership clause, they can initiate the statutory process and assign the benefit as part of the sale contract. The legislation only applies to long residential leases, not business property or a commercial lease.
To start the process, you need to inform the freeholder of your wish to extend the lease via the statutory route and appoint a valuation surveyor and specialist solicitor. Your lease extension valuation will serve as the basis for deciding on a fair premium to offer the freeholder, and also gives you a more accurate idea of how much you should budget.
Your solicitor will serve a S42 Notice on the freeholder and make a formal offer to get the ball rolling. Bear in mind that you are responsible for the landlord’s valuation and legal fees as well as your own.
The freeholder must serve a Counter Notice within 2 months, which usually means a request for a higher premium payment. Both sides now have a 6-month window in which to negotiate an agreed figure. If no progress is on the horizon after 2 months, either party can decide to take the matter to the First-Tier Tribunal (Property Chamber), though fortunately most cases are settled without the need for a formal hearing.
The whole process of extending the lease can take anywhere from 3-12 months.
Negotiating your own lease terms directly with the freeholder is the alternative to going down the statutory route. This offers more room for manoeuvre in terms of the length of the extended term, the premium payable and ongoing ground rent payments, and can provide several advantages to the leaseholder:
That said, while it may be tempting to negotiate a quicker and cheaper outcome in direct communication with the landlord, bear in mind that you will not have the legal protection offered by the Act. It is not unheard of for professional landlords to use this to their commercial advantage.
As a flat owner with a lease that needs extending, it is essential that you obtain good professional advice before making any rash decisions. While your goal will understandably be to control costs while getting a speedy outcome, agreeing to unattractive terms without the benefit of statutory protection can be a risky undertaking that you may come to regret in due course. An offer submitted with suitable protections and following the formal process, on the other hand, may take longer to come to fruition but may well deliver better value in the end.
Posted by Simon on May 26th, 2010
Posted by Simon on November 8th, 2012
