11 Apr 2018
Author: Stephen Breen
A recent case has highlighted the importance for owners of leasehold property to extend their lease early, in order to avoid paying hefty premiums.
In Mundy v The Sloane Stanley Estate, the Court of Appeal considered the extension on a lease for a small flat in Chelsea with just 23 years remaining. The freeholder, Sloane Stanley, claimed a payment of £420,000 was due; but this was challenged by surveyor James Wyatt of Parthenia Valuation, who argued that the system of lease valuation used to calculate the payment was over 20 years old and was invalid. Appeal judges ruled in favour of the freeholder, rejecting the alternative valuation model that was proposed by Parthenia.
The majority of leaseholds are offered for 125 years – but when the lease term drops below 80 years, things can get expensive. At this point, the freeholder is entitled to half any increase in the property’s value that would occur as a result of extending the lease.
Leases can be difficult to sell when they have less than 80 years to run, and as the length of the term reduces further, the lease declines substantially in value. Many lenders refuse to lend on leases with less than 70 years left on the term. Additionally, with the decline in years remaining, the cost to extend the lease increases.
However, where a leaseholder has owned a property or two years, they can serve the freeholder with a Section 42 notice. This entitles the leaseholder to extend the lease by 90 years with the whole term charged at a peppercorn rent (i.e. a nominal rent).
The cost to extend the lease will depend on a number of factors such as where the property is situate, but leaseholders can get a good estimate from the Leasehold Advisory Service calculator. For example, extending the lease on a £250,000 flat in Southport with a ground rent of £160 a year and 90 years unexpired would cost between £4,000 and £6,000 to extend plus expenses. However, the same lease with 70 years left to run would cost between £15,000 and £17,000 plus expenses to extend.
If you decide to extend your lease, our property team can approach the freeholder on your behalf, with a valuation obtained from a surveyor or specialist company. Once the Section 42 notice has been served, the freeholder will have two months in which to respond with their suggested price.
Be aware that you will have to pay both your own legal costs and those of the freeholder. Typically, legal costs will be in the region of £2,500. Whilst this may seem expensive, it is worth doing whilst the cost to extend is relatively low.