In England, there are an estimated 3 million flats currently owned on a leasehold basis. The main difference between freehold and leasehold properties is that in a leasehold scenario, you buy the right to occupy the property for a set period of time but do not own the building itself. With freehold, you own the entirety of the property including the land it sits on. With many leasehold flats built in the 60s and 70s, owners are increasingly finding that they now need to negotiate a lease extension as the leases start to dip below 80 years. Having a short lease can seriously affect the value of your property. While a flat with a lease of 100 years is worth roughly the same as a freehold property, that same flat with an unexpired lease term of 60 years could be valued at approximately 81% of its long leasehold price.
Buying a property with a short lease:
When buying a leasehold property which needs renewing, purchasers commonly calculate their offer price by deducting the estimated cost of extending the lease from the property’s long leasehold value. However, waiting until the lease has less than 80 years remaining will make the cost of extending it significantly more expensive so purchasers should start to get the ball rolling with the seller of the property before completion. It is worth noting that the majority of high street banks won’t lend on a property with less than 70 years remaining.
Where the property has less than 80 years remaining, leaseholders have to pay so-called ‘Marriage Value’ (a compensatory fee to the landlord). Simplistically, marriage value is the increase in the total property value following a lease extension, so if your property value rises by £50,000 once it has been extended this is the marriage value. This figure is equally split between the freeholder and leaseholder (ie, £25,000 is paid to the freeholder). This is important because the length of the lease affects saleability, as most buyers will shy away from a short lease due to the need to implement a lease extension and additionally obtaining a mortgage from a high street lender can prove problematic.
Who can extend their lease:
The Leasehold Reform Housing and Urban Development Act 1993, provides tenants with a statutory right to extend their lease for an additional 90 years at a peppercorn ground rent. The basic qualifying criteria are that the original lease must have been for a term of not less than 21 years from the date of grant and that the property owner must have owned the property for at least 2 years (not lived there, just owned). To implement a statutory lease extension you will need the help of a specialist lease valuer to provide you with a best, likely and worst case valuation range as well as a solicitor or licensed conveyance for the legal work which will include preparing your Notice of Claim, serving the notice on the landlord, answering requests for information and conveyancing the new lease. The valuer’s role is to conduct negotiations on the tenant’s behalf to reach a mutually acceptable premium value.
How much does it cost to extend a lease:
The total cost of undertaking a lease extension can vary greatly and will be dependent on location, the unexpired term of the lease and the availability of funds, be it cash or mortgage financing. The table below provides an indication of the likely premium figures for a property in a non-prime Central London location priced at £550,000.
|Typical lease extension premiums and associated fees for a £550,000 flat.|
|LEASE LENGTH||EXTENSION PREMIUM||PROFESSIONAL FEES (1)||TOTAL COST||POTENTIAL ADDED VALUE (2)||POTENTIAL PROFIT|
|1||Reasonable valuation & legal fees for both the freeholder and leaseholder including VAT @20%.|
|2||Profit levels vary by location and the availability of mortgage funding.|
For further information about effecting a lease extension, please get in touch with me on email@example.com or alternatively visit our website for more information: https://www.kfh.co.uk/chartered-surveyors/general-practice/leasehold-property.htm