Long and short of it
Do you know how many years your lease has to run? If it’s too short, it will affect the value of your property. We’ve put together some advice on how to extend your lease.
31 January, 2024
In London, it is estimated that 60% of flats and 3% of houses are leasehold, so every year thousands of the Capital’s homeowners must extend their leases as the clock ticks down and leases get shorter. Some look on with trepidation, but extending your lease can be one of the best things you can do – and it’s not something to be nervous about either.
Being a leaseholder means you own a right to live in a property for a long time, usually with plenty of T&Cs. And while pets and sub-letting can sometimes be a no-no, the most important condition is the lease length and the consequent repercussions of it currently dropping below the minimum period that most lenders will accept before offering a mortgage – usually 80 years.
At present, the cost of extending a lease for the leaseholder is generally 50% of the ‘marriage value’ of the property – defined as the increase in the value of the property following the completion of the lease extension.
“There will always be a premium payable to extend, but with marriage value currently kicking in when a lease falls under the 80 years, the premium to extend becomes much, much more expensive – so that’s why leaseholders should always be advised to extend before the lease falls below that figure,” says Amber Krishnan-Bird, a solicitor who is part of the Londonwide conveyancing panel working at Osbornes Law.
“Marriage value is where the profit in the additional market value that the lease extension will bring is split 50/50 between the freeholder and leaseholder – so the leaseholder must pay that ‘uplift’ share to the freeholder. And even if you’re not selling, it doesn’t mean the length of the lease isn’t important. If you want to re-mortgage, you might struggle to find a lender who will offer you competitive terms and those that will lend may charge a higher interest rate or demand a certain level of equity in the property.”
However, the government introduced a draft Leasehold and Freehold Reform Bill at the end of November 2023, and one of the main – and most controversial – changes illustrated is that marriage value would be scrapped.
There is no guarantee that this new bill will be passed, though – particularly before the next general election. That said, new legislation would also mean that the standard lease extension term for flats will increase from 90 years to 990 years.
As of 2022, serving a Section 42 Notice starts the formal lease extension process that entitles you to add currently 90 years to the length of your lease and automatically reduce any ground rent to zero. On top of the premium of the lease extension itself, you’ve got your own solicitor’s costs and your valuer’s as well as your freeholder’s legal and surveyor’s costs. You’ll also need to have been registered as the owner of the property with the Land Registry for at least two years, although if the new bill is passed, this is likely to change.
The process can take a long time so if a lease is short, buyers might want to factor in the cost of extending the lease when they take ownership, advises KFH conveyancing manager Emma Munday. “Homeowners don’t always realise it as it’s not something you can see, but as the lease gets shorter, the value of the asset can be affected,” she explains. “That’s why some properties on the market are cheaper than others in the same building.”
Krishnan-Bird adds: “Once you serve a Section 42 Notice, under the Leasehold Reform, Housing and Urban Development Act 1993, the ‘clock stops’ while the statutory procedure is then followed. This means if you serve the notice the day before the lease falls below 80 years, the clock stops for the purposes of the 1993 Act and the lease extension application.”
“It’s important to say while most freeholders are often open to voluntary lease extensions because they are quicker and involve less legal costs, a freeholder can’t be forced to agree to a voluntary extension or forced to agree to a shorter extension although they may be open to it,” says Munday. “With short lease extensions it’s important to consider whether you are receiving good value for money.”
Paul Masters, KFH’s group operations director, says although the costs of lease extensions should ease once the Leasehold Reform Bill becomes law, extending leaseholds will remain an area where expertise will be required. “The KFH team of chartered surveyors and our specialist panel of solicitors have an exceptional track record of successful outcomes for our leaseholder clients,” he adds.
“As we have outlined here, it’s not an exercise an unqualified person is likely to navigate easily, but leaseholders should not be put off starting the process as will it protect what is likely to be their most valuable asset.”