As the owner of a leasehold property you will be fully aware that the length of the remaining lease materially affects the value of your home. It’s a depreciating asset and there will come a time when you seriously need to consider a lease extension in order to protect your financial investment.
Industry professionals advise that the ‘magic number’ is 80 years, and you are urgently encouraged to extend your lease well before it reaches that figure. The reasons for this is something called ‘marriage value’, which makes renewing a lease that has less than 80 years left to run disproportionately expensive.
How is the premium calculated?
Confused? You may well be. So, we asked a leading firm of London surveyors to shed light on exactly how the cost of a lease extension is computed:
“The premium has two parts: the reduction in the value of the freeholder’s interest and, where the lease is shorter than 80 years, 50% of ‘marriage value’. The first part comprises compensation for the freeholder’s lost ground rent, and for deferring their ability to reclaim the property by another 90 years. Marriage value is the increase in the combined value of the freeholder’s and leaseholder’s interests arising from the lease extension.” (Peter Barry Chartered Surveyors) They go on to conclude that “the more time you have left on your lease the less it will cost to extend it, so it’s always best to act early.”
How will your mortgage be affected?
Not surprisingly, mortgage lenders are also well aware of leasehold properties being wasting assets. A lease under 80 years is considered a short lease, which may make the property more difficult to mortgage and to sell. By way of illustration, What Mortgage reports that Leeds Building Society require at least 85 years remaining at application, Halifax insist on a minimum of 70 years and Santander and Nationwide Building Society each require at least 55 years at application and 30 years at the end of the mortgage term.
If you are thinking of remortgaging to get a better deal, you may be unable to achieve this unless you extend the lease at the same time. When it comes to selling, prospective buyers may encounter problems when applying for a mortgage, and once the lease drops much further, you will have to find a cash buyer.
Statutory lease extensions
There are two ways to extend the lease on your property – using the statutory process or making informal arrangements. The Leasehold Reform Housing and Urban Development Act 1993 gives leasehold owners the legal right to a lease extension, using the above-mentioned formula to calculate the premium payable to the landlord. In order to qualify, you must have owned the property for a minimum of 2 years – a key consideration if you are thinking of buying or selling a property with 80-90 years remaining.
Taking the statutory route to a lease extension has several important advantages for the leaseholder:
- Your flat will get a 90-year extension on the existing lease term (50 years on a house)
- Your ground rent will be reduced to zero
- The valuation date is locked once notice has been served, removing any uncertainty
- You will be able to contest any unreasonable terms under the Act
- You pay an initial deposit, with the landlord’s recoverable costs due at the end
- Where necessary, landlords are responsible for their own tribunal costs
- Uncooperative, unresponsive and missing landlords can be dealt with under the Act
What’s more, the government is proposing to introduce further reforms to the lease extension process, giving leasehold owners the right to a 990-year extension, so watch this space!
Informal lease extensions
Of course, there is no obligation to take the statutory route; you are at liberty to approach your freeholder outside of the Act at any time and make your own arrangements. Negotiating your own lease extension terms, including the length of the extended term, the premium and any future ground rent payable, will give both sides greater flexibility, and may offer a number of advantages that shouldn’t be underestimated:
- No eligibility criteria for leasehold owners
- Lower legal costs compared to following the statutory process
- Faster outcome since formal procedures need to be adhered to
- More flexibility in negotiating mutually agreeable terms
But – and it’s a big but – taking the informal route does not provide you with the legal protection offered by the statutory lease extension process. This means that:
- Either party can change the terms or withdraw from the agreement at any point
- The freeholder is under no obligation to keep to a set timeframe
- You might have to pay the landlord’s legal fees and valuation costs upfront
- You may face less advantageous lease terms and a higher premium
- You will have no access to a Leasehold Valuation Tribunal
It may be tempting to open direct communication channels with your landlord in the hope of a quicker and cheaper outcome. However, without the legal protection offered by the Act, it is possible for professional landlords to turn the lack of formal process to their commercial advantage.
Stories abound of extortionate upfront admin fees, dubious ground rent escalation clauses, and delayed responses designed to extract higher premiums. In signing away important leaseholder rights contained in the Act, you are making yourself more vulnerable to unscrupulous practices.