Important Lease Extension Advice from ALEP & Leasehold Life
ALEP (the Association of Leasehold Enfranchisement Practitioners) issues its annual reminder today that flat owners can save thousands of pounds just by checking their leases still have sufficient years to run.
Many leases are dated at the end of the quarter, June and December seem the most popular dates. If your lease has less than 85 years to run, every year that the lease reduces, the cost of extending your lease or buying the freehold rises. Under 80 years, the cost rises at an accelerating rate.
Many prospective purchasers want to know if they can extend the lease during the conveyancing process but they are often not told that they will have had to have owned the property for 2 years in order to be protected by lease extension legislation. However, it’s not actually the lease that is extended at this time but the ‘right’; to be able to extend it at a later date that is secured. If the lease has between 80 and 82 years unexpired on its term, it is advisable to establish that the seller is actually in a position to serve a Notice on the freeholder (or intermediate landlord) to extend the lease after exchange. If so, the seller will firstly serve a Notice (a Deed of Assignment of the Benefit of the Notice) to the competent landlord. Certain clauses will then be inserted into the Sales Contract stating who will serve the Notice (the seller) along with when and who will pay the costs to cover the lease extension process (the buyer).
Alex Greenslade, Honorary Secretary of ALEP, said: “Depending on the value of your property, the cost of extending the lease or buying the freehold can rise by hundreds or even thousands of pounds a year. Just occasionally we learn that some leaseholders without realising it have left their leasehold to run down so much, they no longer own the property they thought was theirs.”
He continued: “Yet it is so simple to preserve the value of your investment, if you act in time. Before the end of the year when we all make resolutions to do things we’ve been putting off seems just as good as any. Finalising the cost of a lease extension or freehold is best negotiated by valuers and solicitors who specialise in this area. The negotiation depends on a number of factors, including the value of the property, the ground rent due for the remainder of the lease and the lease length.”
An example of how much it could cost to delay extending a lease or buying the freehold is as follows:
Current value of property £200,000 (with a £100 ground rent per annum). Approximate cost to extend lease by adding 90 years and reducing ground rent to zero:
At 85 years – £7,000
At 75 years – £9,000
At 70 years – £12,000
At 65 years – £17,000
Sometimes the agent will give a rough estimate of what a lease extension will cost but fails to advise that if the lease has less than 80 years left on it then it is going to be more expensive than if it has more than 80 years left on it. This is because of what is known as ‘marriage value’ which subtracts the value of the property before a lease extension is granted from the value it could reach afterwards.
The landlord’s interest lays in the amount of ground rent he can expect to receive during the term of the lease but this is lost when an extension is granted. It is this loss of ground rent which is then added to this increased value figure. The ‘marriage value’ is then split between you, the leaseholder and the freeholder (as long as he is the superior landlord). The cost of a lease extension should always be less than the increase in value it creates, i.e. the increase in the value of the property will be more than the outlay.
Another reason not to delay is that the process of extending a lease can take many months, particularly if the freeholder takes a tough stance in negotiations. A sale can be delayed by a lease extension, since the buyer, their solicitor or mortgage lender may insist on a lease extension being in place before completion funds can be transferred. If the lease length cannot be resolved quickly, the buyer might just walk away.
All in all it pays to be proactive, not reactive. Many freeholders rely on flat owners not realising that their lease lengths have slipped to a dangerous level and hope to benefit from the bargaining position this gives them.