Lengthening the Lease

The majority of flats for sale these days are leasehold, however if you’ve bought a flat with the ‘share of freehold’ (meaning you share the freehold with other parties) then that will eliminate most of the problems we are going to discuss in this article - if not read on! The majority of flats being bought are on a leasehold basis with a given number of years remaining on the lease, for example most new flats are sold with 125 years remaining with an annual ground rent payable to the Freeholder, as they own the land and the building on which your flat is situated. You’ll also pay an annual service charge for the repair and maintenance of the building. Anyone can be the Freeholder, but often it’s the local council that ultimately owns the property.

At the end of the 125 years lease, ownership of the flat (in law) is transferred back to the Freeholder. No problem right? The oldest person that ever lived hit the grand old age of 122 so it’s unlikely you’ll get booted out in your life time. However all is not quite as simple as it appears. You are going to have a potential problem to deal with if you have bought a flat with say less than 100 years remaining and you’re not planning to sell the flat within the next fifteen or twenty years.

Yes, you have the right as a Leaseholder to extend your lease by an extra 90 years at ‘a fair market price’ and to convert your annual ground rent to zero (under The Leasehold Reform, Housing and Urban Development Act 1993), however this piece of legislation also dictates that if you apply for this lease extension when your lease has dropped below 80 years remaining (even by a single day) then the same lease extension will cost considerably more, as you’ll then have to stump up an additional cost known as “marriage value”, than if you bought the lease extension at a point when you had more than 80 years remaining on your current lease. Consequently you may run into problems selling your flat with even, say, 85 years remaining on the lease, as any knowledgeable buyer - and certainly their solicitor - will point out that the buyer will have to deal with the issue of the lease extension before it drops below 80 years remaining. Of course there’s also an additional problem that many mortgage lenders may not lend to your buyer with a lease below 80 years remaining which will limit the appeal to any buyer needing a mortgage, which let’s face it, is most people these days.

“mortgage lenders may not lend to your buyer with a lease below 80 years remaining”

Even if you have say 96 years remaining today and you plan to keep the flat for at least the next ten years then it would be wise to extend the lease immediately to 186 years remaining with a zero ground rent, as even without the problem of the lease extension cost rising considerably at the point of 80 years remaining, the cost of the lease extension will also increase considerably with every passing year. Over the next five or ten years if local property values continue to increase, as they almost certainly will in London, it’s highly likely you will pay more than you may have needed to as the calculation of how much you need pay (a complex calculation at best) takes property values into account.

Talking to a specialist chartered surveyor who specialises in advising upon the fair cost of buying the lease extension and who handles the subsequent negotiations is really worth it to reach a fair price with the other side. In short - the sooner you extend your lease, the cheaper it will be.

Words:
David Goldstone
Capital Leasehold