Friday, 13th April 2012
We often receive enquiries from leaseholders who either have their property on the market or are planning to do so, and have just discovered the implications of having a short lease. Quite often in my experience, estate agents when first acquiring a flat on their books will underplay the impact of a shorter lease. Click through any number of properties on Rightmove and often any information on the lease length will be strangely absent. ‘TBC’ or ‘to be sold with a new lease’ are some of the more familiar wordings.
In dealing with lease extensions on a daily basis you become very aware of the effect a lease has on a property’s value. Even leases over the 80 year mark (the point at which marriage value takes effect) should be investigated and ultimately extended. A purchaser today who acquires a flat for £250,000 with an 85 year lease will have to wait 2 years until they can extend under the Leasehold Reform, Housing and Urban Development Act 1993 by which time an extension could cost up to £10,000 including professional fees.
So what do you do if you are looking to sell and find out that you need to extend your lease? In my opinion there are 2 options:
Option 1 – Extend under the the Act
As a general rule as long as you have owned your flat for more than 2 years you will have the right to extend under the Act. Technically speaking you don’t actually extend your lease but acquire a new lease with a length equal to the existing term plus 90 years. The lease is typically on the same terms and the ground rent will revert to a ‘pepper corn’ or nominal rate.
Once you have instructed a surveyor to produce a report and value the cost of a new lease the next step is to serve notice on your freeholder and invoke the Act. The only negative here is that whilst the Act establishes timeframes for responses from the freeholder, the whole process is likely to take a minimum of 3 months and most likely nearer to 6 months to complete. Not a particularly helpful length of time if your property is due to be marketed in the near future or you have prospective buyers.
Thankfully you can assign the notice with your lease, meaning that you can serve the notice and sell the flat with the benefit of the application. The prospective buyers can continue the process after the sale. You must also serve the notice before you exchange contracts. They will request that the purchase price reflects the future costs they are likely to incur which including professional fees will be on the generous side to ensure they will not be at a loss. Whilst this is ultimately an issue for negotiation between the parties, your surveyor should include in his report the likely cost parameters of acquiring a new lease and therefore give you some idea of a reasonable discount.
Option 2 – Approach your freeholder for an extension outside the Act
In all normal circumstances I would not advocate this route, as in the vast majority of cases the premium that a leaseholder will end up paying will be an equivalently more expensive sum than proceeding under the Act. Ultimately the freeholder knows that at some point in the future the lessee will need to extend and will have some idea of what this will cost under the Act, thus any offer outside of the Act will need to be of greater value to the freeholder.
As a leaseholder you may well have received such an offer from your freeholder on a previous occasion. A typical offer would be an extension to either 99 or 125 years, with increased ground rent provisions. It would be up to the expertise of your surveyor to determine whether this is reasonable or, if you are making the initial proposal, put forward figure to the freeholder.
Whether on not your offer is accepted or negotiated to an acceptable level is entirely at the freeholder’s discretion. Some will insist on a heavily increased premium which is totally unrealistic whilst others may tactfully offer an expensive yet obtainable option which is of very sound financial reasoning to them, yet allows the lessee to extend to 99 years in a short space of time and ultimately sell their flat with a long lease.
How you choose to proceed yourself is very much determined by your circumstances. I would always recommend that you seek the advice of an experienced leasehold surveyor who can advise you on the best course of action.
In my next blog I will produce a worked example of the likely premiums you would look to pay under each route. In the mean time if you have any queries please do not hesitate to contact us by email of phone if you have any further questions.
Author: The Surveying Team