If you own a flat, you’ll probably be aware that the value of your property is affected by the term left on the lease. In addition you’ll find that mortgage companies are reluctant to lend on flats with less than 70 years to run, so the saleability of your property reduces as the term runs out and the possibility of remortgaging is lost.
Fortunately, the law lets you extend the term for a price – but you may have also heard that reform is on the cards.
In 2018 the Law Commission published a Consultation Paper, “Leasehold home ownership: buying your freehold or extending your lease” on leasehold enfranchisement – the process of extending your lease or collectively purchasing the freehold. The Paper reported that the current laws governing the enfranchisement regime is the product of over 50 Acts of Parliament, totalling over 450 pages – and consequently, there is a great deal of complexity involved.
The amount that the leaseholder pays to extend the lease is comprised of:
(1) professional costs paid to lawyers and valuers; and
(2) the price the leaseholder needs to pay to the Landlord for the extended lease or the freehold.
However, the complexity of the process results in high legal costs, and the complexity of valuation results in high valuation costs. These costs can be significant, and sometimes can be disproportionate to the value of the property concerned.
The Paper offers a number of solutions with the need to balance the rights of the Landlord and the Leaseholder in mind. These include, for example, the adoption of a simple formula in calculating the premium, to replace the need for the premium to be calculated on market value. A simple formula would likely reduce the premium payable which goes in favour of the leaseholder.
Those leaseholders whose terms are reducing might therefore be wondering if they should wait for the reforms, or act now. In making a decision, it’s important to appreciate that the Law Commission’s consultation was just that – a consultation – and it may be that the law does not change for many years, if at all.
In the meantime, leaseholders should keep in mind that leases with 80 years or less left to run become more expensive to renew. At 80 year or less, you pay 50% of the flat’s marriage value on top of the normal lease extension price.
Marriage value is essentially half of the difference in value between the value of the property before renewal and the value of the property after renewal. The key point is, this extra payment is only due if the lease has 80 years or less left to run. For leases with more than 80 years left to run, the marriage value is taken to be zero. So if you’re around the 83 year point, you should give some serious thought to acting now – waiting for reform which may or may not happen could be an expensive mistake.
Another reason to extend now rather than wait is that you might want to sell your flat or remortgage in the near future. Since many mortgage companies will not lend on properties with a short lease (e.g. 70 years or less), the only buyers you’ll attract are those with cash. Whilst you may not be thinking of selling or remortgaging immediately, your circumstances could change rapidly – and failing to extend now will mean a delay before you can sell/remortgage when you need to.
A final point to take into consideration is that the cost to extend increases as the term reduces. So for example Leasehold Advisory Service data suggests that a lease with 70 years left to run will typically cost £14,000 plus legal fees to extend; whilst a lease with 60 years will typically cost £24,000. So even if that dreaded 80 year mark has already past, it is worth extending early on as the premium will likely increase with each year that passes.
To be able to extend your lease, you’ll need to have owned the flat for two years. This is something to keep in mind if you’re looking to purchase a flat close to the 80 year mark – if you wait until you’ve completed the purchase, you’ll have to then wait a further 2 years before you have the right to extend.
If you would like to discuss your lease buying options further, complete our free enquiry form below.