12 Feb 2020

If you are the owner of a residential leasehold property, it is in your financial interest to have at least a broad understanding of lease extensions to enable you to take advantage of your statutory rights and safeguard your investment.

Leasehold property is a depreciating asset

When you buy a leasehold property (typically a flat), you are not acquiring the building or land it is standing on; that is still owned by the freeholder. What you are in fact purchasing is the right to occupy the property for a specified period of time, i.e. the number of years left on the lease.

New leases can be issued for 99 years, 125 years or even 999 years but the remaining years when you buy the flat may be much shorter. As the lease runs down, the property value falls until the lease has expired when, at least in theory, the asset reverts back to the freeholder.

Properties with a short lease are hard to sell

While long leases have little effect on the property value, it all changes when the remaining years approach 80 years. Try to remortgage a flat with less than 80 years left on the lease and you will soon find that lenders are not at all keen to offer finance. Many will flat-out refuse while others may offer punitive mortgage rates to protect their risk. Selling a flat with a short lease will therefore be limited to a market of cash buyers.

Why? Schedule 13, Part II of the Leasehold Reform, Housing and Urban Development Act 1993 (the Act) states that lease extensions for properties with unexpired lease terms of less than 80 years attract a ‘marriage value’ (which is the increase in the property value arising from the combined leasehold and freehold interests). As the lease runs down, the marriage value goes up, making the cost of any lease extension an increasingly expensive undertaking.

You have the right to a statutory lease extension

The Act gives property owners the statutory right to extend the lease by 90 years and eliminate any ground rent, provided that the correct legal process is followed, and a mutually agreed premium is paid to the freeholder. In order to be eligible for a statutory lease extension, you must have owned the property for at least 2 years. If you are looking to buy a short lease property you could ask the seller to initiate proceedings and transfer the benefit to you upon completion of the sale, thereby avoiding the 2-year wait.

Of course, you can approach your freeholder at any time to negotiate a lease extension outside of the statutory process. Be warned though that any such agreement won’t be bound by the Leasehold Reform Act 1993, so caution is advised and legal advice should be sought before you go down this route.

When it comes to negotiating with your freeholder, a Section 42 Notice must initially be served on the landlord, while a lease extension survey will form the basis of your negotiating position. The whole process can be long and laborious and it is best done with professional help to achieve the best premium and avoid unnecessary costs.

At Foundation Surveyors, we have many years of experience in this field. Our lease extension surveyors work across London, providing lease valuations and assisting with lease extensions for freeholders and leaseholders. Please contact us to speak to a specialist to find out how we can help.

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