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Should you consider a lease extension?

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Lease extensions are something of which every owner of leasehold residential property in England and Wales should be aware.

If you own a flat, you almost always own a leasehold interest in the property (for more information on leaseholds and freeholds click here). As a leaseholder you effectively rent your home for a certain amount of time (usually, initially, for a period of 99 years or more). You own the right to occupy your home for the period of the lease, but you do not own the building itself. As a leaseholder you usually have to pay ground rent (usually a relatively nominal amount) and a service charge (often considerably more) to the person that owns the freehold interest in the building in which you live. You can, of course, sell your leasehold interest and, when you do so, you pass on to the buyer the remaining period of the lease.

So, as a leaseholder, the period for which you have bought the right to occupy your home reduces on a daily basis. In general a leasehold property is not significantly less valuable than a similar freehold property. However, this position changes as the length of your lease diminishes. To counteract this problem, under the 1993 Leasehold Reform Act, most flat-owners are legally entitled to get 90 years added to their lease at a fair market price. To qualify for this entitlement you need to have owned the flat for at least two years. You don’t need to have lived there, just owned it.

So, why should you consider extending your lease and when is it sensible to consider doing so?

Extending a shorter lease to a decent length can add thousands to your property’s marketing value. Generally, the shorter the lease on your property, the lower the asking price when you come to sell it. Check how long you’ve got left on your lease. If your lease is under 70 years, mortgage rates may, at best, increase for anybody requiring a mortgage to buy the property. The property will be virtually unmortgageable if the lease is under 60 years, so you will struggle to remortgage a property with a short lease. If you want to sell such a property, you’ll probably have to sell to a cash buyer or at auction.

If you have more than 90 years remaining on your lease, the value added to the flat  by obtaining a 90 year extension may only be a little more than your costs. There is no urgency for flat owners with 90 years or more left on their lease and who are staying put. However, everyone – whether selling or staying – should start thinking about a lease extension once their lease term gets to around 83 years. The reason for this is that there is a magic number of years at which leases become much more expensive to extend. That magic number is 80 years. The reason for this is that, for leases of less than 80 years, you will pay 50% of the flat’s ‘marriage value’ on top of the usual lease extension price. Marriage value is the amount of extra value a lease extension would add to your property. So, once the lease drops below 80 years, you are giving value away to the freeholder.

There are various calculators available on the internet that demonstrate this potential loss of value. One such can be found here. Try doing the valuation calculation for a lease of 81 years and then for a lease of 79 years.

Even if your lease is just above 80 years you must remember that you have to have owned the flat for two years before you can extend, so a buyer cannot immediately extend the lease. A seller can, however, get the ball rolling and pass the rights on to the buyer. But, if a buyer waits until they’ve completed the purchase before starting the process, it will be another two years before they have a right to extend.

In general, the shorter a lease is the more costly it will be to extend. If your lease is shorter than 60 years, talk to a solicitor about how much it will cost to extend. Excellent legal advice is a must.

The price of extending a lease depends on several variables, including the flat’s value, the lease length and ground rent. It also depends on your negotiations. We suggest you ask other residents in the building how much their lease extensions cost, as this provides a useful guide.

On top of the cost of the lease extension itself, you also have to pay the following:           

Legal fees You’ll need to pay your legal fees, plus the freeholder’s reasonable costs and valuation fees. Importantly, this does not include the freeholder’s legal costs for negotiating the price or for dealing with court or Leasehold Valuation Tribunal applications.

Valuation fees

 A surveyor will need to visit your home to put a figure on the lease extension. These valuations typically cost about £400 to £900, depending on your flat’s value.

Stamp duty

 Stamp duty applies to lease extensions in the same way as any other home purchase. However, this is unlikely to affect most flats, as you don’t have to pay anything if the extension price is £125,000 or less. If it’s more, use our Stamp Duty Rates Page to see how much you’ll pay.

The lease extension process can be quite slow so, if you’re thinking of selling your home, start early. Though it’s worth noting that the clock stops running once you serve the notice, so if you file at 81 years, the lease won’t tick down to 80.

The Leasehold Advisory Service has a wealth of free advice on leasehold law, including service charges, extending your lease, buying the freehold, right to manage and applying to the Leasehold Valuation Tribunal. You can also get advice in person or by calling 020 7383 9800. 

Another useful source of info is the Government’s Leasehold site.

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