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The Benefits of Extending Your Lease in Good Time

Friday, 9th November 2012 | by: Peter Barry

If you own a flat or maisonette it is almost certainly held on a lease. The original term of the lease is likely to have been 99 or 125 years and there will be provisions for the Landlord to collect ground rent every year at an amount that will normally increase throughout the term of the lease.

As the remaining term of the lease reduces so does the value of your investment but fortunately changes in the law over the last 20 years have provided a relatively low cost method for leaseholders to protect their investment; provided they do not leave it too late.

The critical point as regards extending your lease (technically you will be acquiring a new lease) is 80 years as this is the point that marriage value kicks in. Marriage value is the difference in value between yours and your Landlord’s interests before and after the granting of the new lease and the Leasehold Reform, Housing and Urban Development Act 1993 states that any increase in that figure should be split equally between the two owners.
The effect of marriage value is best demonstrated by comparing the cost of extending the lease on a property when it has an unexpired term of just over 80 years as opposed to an unexpired term of 79 years, our sample property will be worth £250,000 with a new long lease:

Now as a brief overview, the valuation is made up of 3 parts. The first arises from the fact that upon the granting of a new lease under the Act, the ground rent payable by the leaseholder will become ‘peppercorn’ or zero. As a result the Landlord needs to be compensated for that loss of income, so we need to establish the value of that right to receive ground rents for the remaining 79 and 80 years of the lease. The second part relates to the fact that if the lease were to run its course; the Landlord would receive a property worth £250,000 in both 79 and 80 years time.

Now in both instances these two elements result in very similar costs for the leaseholder but what makes a far more substantial difference is the third element of the valuation; marriage Value.
The cost of extending the 80 year lease is approximately £5,500. The 79 year lease, by contrast, would cost around £10,000 to extend. The value of the property with a 79 year lease would be in the region of 95% of its value with a long lease, hence the now apparent difference between the two figures.

If you own or are considering purchasing a leasehold property, please feel free to contact one of our experienced leasehold valuation surveyors who will be on hand to advise you on the best course of action.