Introduction
I've been in the property industry for over a decade and one thing I'll say is that lease extensions are not fun, but unfortunately leasehold tenure makes uo a huge portion of the housing stock in the UK, so it's crucial to understand how the lease extension process works as it is likely to impact you at some point in your property ownership journey
What Is A Leasehold Property?
Aleasehold property in the UK represents a unique arrangement. In this structure, the homeowner holds the property but not the land beneath it. Instead, they have a lease agreement with the freeholder/landlord specifying the duration and terms of their ownership rights. It's a common scenario, but as the lease term dwindles, so can the property's value and market appeal
What is a Lease Extension?
A lease extension is a lifeline for leasehold property owners seeking to prolong their ownership (it can also be referred to as a deed of variation). As the years on their lease diminish, the need for an extension becomes more pertanent. This legal process allows them to extend their lease, securing an extended period of ownership beyond the original term.
Extending Your Lease: Statutory Law vs. Direct Negotiation
Leaseholders have two primary avenues for extending their lease: through statutory law or direct negotiation with the freeholder. The statutory route, governed by the Leasehold Reform, Housing and Urban Development Act 1993, provides a structured process and safeguards for leaseholders. Alternatively, direct negotiation involves reaching an agreement with the freeholder without statutory protection.
While informal negotiations with your freeholder may seem attractive, opting for this route often involves only covering your legal and valuation costs. In contrast, the formal lease extension entails covering both your and the freeholder's costs. Despite apparent savings in legal fees, this could be a "false economy," potentially resulting in paying thousands more for the extension and making your home challenging to sell.
The main drawback of informal extensions is the freeholder's ability to manipulate details to their advantage, such as retaining your ground rent. Opting for the formal statutory route ensures a reduction of your ground rent to zero. Though, as of June 30, 2022, freeholders can't increase ground rent through an informal extension, they can maintain the existing ground rent for the current term. Another risk is the freeholder granting a shorter extension term, whereas the statutory route guarantees your existing term plus an additional 90 years.
The Lease Extension Process:
Eligibility: Leaseholders must meet certain criteria, such as having owned the property for at least two years.
Notice: The process begins with the service of a Section 42 Notice on the freeholder, expressing the leaseholder's intention to extend.
Valuation: A chartered surveyor assesses the property to determine the premium for the lease extension, factoring in elements like property value, remaining lease term, and potential improvements.
Negotiation: Leaseholders and freeholders negotiate the premium, a process often requiring professional guidance.
Legal Process: Once terms are agreed upon, legal documents formalise the lease extension, stipulating the new lease term and any alterations to lease conditions.
Timeline:
The timeline for extending your lease typically ranges from 4 to 12 months. Engaging efficient professionals such as valuers and solicitors can expedite the process, so it's important to choose these experts carefully.
Costs Involved In A Lease Extension:
Lease Extension Premium:
This is the payment made to the freeholder in exchange for the extended lease. The calculation involves factors like the property value, remaining lease term, ground rent & the presence of marriage value.
Professional Fees:
Hiring a solicitor to handle legal aspects of the lease extension is crucial. Solicitor fees can vary, and it's recommended to get quotes in advance. Additionally, engaging a surveyor to determine the premium and other valuation aspects is advisable.
Freeholder's Costs:
If you pursue the formal statutory route, you may be required to cover reasonable costs incurred by the freeholder, including their legal and valuation fees. However, negotiations can influence the distribution of these costs.
Land Registry Fees:
When the lease extension is completed, you'll need to update the Land Registry with the new lease details. Fees for this service apply, and they depend on the property value (although these costs are minor in the broad scheme of things)
First Tier Tribunal Fees (if applicable):
In case of disputes, you may need to take the matter to the First Tier Tribunal. There are associated fees, and while this is relatively uncommon, it's essential to consider this potential cost.
Notice Fees:
If you are initiating the lease extension process, you'll need to serve a formal notice on the freeholder. There may be costs associated with this notice, and it's crucial to follow the correct procedures. This is referred to as a Section 42 Notice
Possibly Marriage Value:
If the remaining lease term is below 80 years, marriage value might apply. This could lead to additional costs, as you may need to compensate the freeholder for the increase in property value resulting from the extended lease.
Marriage Value:
Marriage value is a concept central to lease extension calculations. It represents the increase in the property's value resulting from the lease extension. Marriage value becomes significant when a lease has less than 80 years remaining.
When a lease falls below this threshold, lease extension costs typically increase, as the leaseholder is required to compensate the freeholder for the potential increase in property value resulting from the longer lease term.
This compensation is usually calculated based on a percentage of the marriage value.
It's worth noting that the calculation and application of marriage value can be complex, and leaseholders should seek professional advice, such as from a surveyor or solicitor specializing in lease extensionsIt's worth noting that the calculation and application of marriage value can be complex, and leaseholders should seek professional advice, such as from a surveyor or solicitor specialising in lease extensions
Lenders' Perspective on Short Lease Properties:
For those eyeing properties with short leases, navigating the mortgage landscape can be tricky. Many lenders are cautious, and some may decline loans for properties with leases below a certain threshold (typically less than 70 years)
Buying a Property with a Short Lease:
For those considering purchasing a property with a short lease, a strategic approach is essential. While the lease extension process usually starts after two years of ownership, you may be able right to extend the lease right away if the seller is willing to assign this right to you
In scenarios liek this, it is advisable that the buyer's solicitor drafts the Section 42 notice and not the seller's solicitor as it will be the buyer's resoinsbility to follow this extension process through upon completion
Some investors specifically target short lease properties as they typically come with a discount and can represent an attractive return on investment
What's considered short lease?
From experience, I would recommend buying properties with leases of at least 100 years and above, from a resale perspective, flats are much less appealing when they have a lease of 90 years or less
Final Thoughts
As you've now seen, lease extensions are no straighforward task and require technical understanding, seek professional advice from conveyancers and leasehold specialists before initiating the process yourself.
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