When should you extend your lease?

Over recent months I have seen an increase in the number of leaseholders contacting us for advice on how to extend their lease. In many respects this is unsurprising given the proliferation of leaseholds created in the 1980s and 1990s means that all of these leases are now at the stage where renewal should be a serious consideration.

Whilst mortgage brokers can often obtain mortgage finance for leaseholds with 55 – 60 years remaining you should not, in an ideal world, wait that long before seeking to extend the lease.

In my opinion you should extend your lease before it drops below 80 years as when the lease falls below this level, you are obliged to pay 50% of the marriage value associated with that lease which invariably increases the costs significantly.

Marriage value is the increase in the value of the property following the completion of the lease extension, reflecting the additional market value of the longer lease.  

Aside from the marriage value there are other factors which determine how much a lease extension will cost you. One is what is called the value of the reversionary interest.  Imagine you have 60 years left on your lease and the property is currently worth £200,000. What we surveyors calculate is how much someone would pay today, for the right to receive £200,000 in 60 years time.

Added to this is a compensatory payment to the landlord for the ground rent that would be lost over the remaining period of the lease.

The collective total of these items will broadly represent the cost of the lease extension. Bear in mind also, that it is customary that in addition to these costs, you will pay the freeholders reasonable legal fees associated with the lease extension.

How do I go about it?

If you are decided that a lease extension makes sense then there are broadly two methods that can be used. I call these the formal and informal route. The informal method is simply a case of contacting the freeholder and enquiring the sum they will charge to grant you a new lease. What normally follows is some horse trading on price following which solicitors can be appointed to undertake the legal formalities once a price has been agreed.

The advantage of the informal route is that it can be more cost effective. For example if your lease was 80 years then you could in theory ask for a price to take it back to 99 years which would be cheaper than the formal route where you would receive an additional 90 years. Additionally you could agree to retain a ground rent or even increase the ground rent in return for a reduced premium on the lease extension itself. Such a plan could be ideal for those who just want to improve the marketability of their leasehold ahead of marketing it for sale or if remortgaging.

The formal route…

The formal route is generally used when the leaseholder feels the freeholder may be over ambitious with their demands on price or where they feel that an informal negotiation will be unsuccessful. The formal process works on the basis that you serve what is called a Section 42 notice on the freehold detailing the terms you require and the price you are willing to pay. The freeholder is then obliged to respond and either agree or present a counter proposal to you.  Generally speaking your initial submission would be based on a professional valuation and your freeholders response would also be based on a professional assessment. Consequently the negotiation on this route tends to be by the respective surveyors rather than the parties themselves.

A formal application will result in your lease being increased by 90 years from its current term together with the removal of the ground rent. An informal extension on the other hand is entirely down to the parties to negotiate.

Maintaining a sensible lease length should mitigate your exposure to extended costs further down the line as well as promoting the value and marketability of your property asset. In addition it will make securing money on the property far easier than would be the case with a short lease.

Why not spend an hour or two reviewing your portfolio to remind yourself of your lease lengths and make an assessment whether any should be renewed.

If you are considering acquiring a property with a short lease you should be aware that you are not legally entitled to a lease extension until you have owned the property for at least 2 years. In such circumstances you may wish to ask the seller to serve the required notice on the freeholder before they sell the property to you and that way you will be able to extend the lease as soon as you are ready.

If you would like us to assist in lease negotiation or renewal then we would be delighted to hear from you on 01843 583000 or [email protected]