Over the past few years, the leasehold system has come under significant scrutiny for being unfair and complex. Issues such as extortionate ground rents and service charges, as well as the potentially huge cost involved in extending a lease or buying the freehold, can make owning a leasehold property expensive, complicated and stressful.
Meanwhile, the number of years remaining on your lease can have a significant impact on the asking price of your home, should you choose to sell it, as well as making it extremely difficult to remortgage. In this article, we explain how you can maximise the value of your leasehold property.
What is a leasehold property?
When you purchase a leasehold property, you own the property itself, but not the land it is built on. As a leaseholder, then, you are essentially renting the property from the landlord (or ‘freeholder’) for a certain number of years. As a general rule, most flats are sold as leasehold properties, while most houses are freehold (although they can be sold on a leasehold basis, and usually are if purchased through the Shared Ownership scheme).
What is a lease?
Your lease is a contract between you (the leaseholder) and your landlord (the freeholder) giving you conditional ownership of the property for a set period of time. The usual length of a lease on a new property is either 99 or 125 years, although some larger developers (for example, Persimmon and Barratt Homes) are now offering much longer 999-year leases.
The lease also sets out the contractual obligations between yourself and your landlord. Generally your obligations will include the payment of ground rent and service charge, while your landlord will be contractually bound to maintain, insure and manage the building. The lease may also set out restrictions on what you are permitted to do in your property (called restrictive covenants). For example, some leases may prohibit you from keeping a pet in your flat.
Why does the length of my lease matter?
While a lease is normally granted for a period of 99 or 125 years, the length remaining on the lease can be misleading. Once the remaining term on your lease has dipped below 90 years (which may still seem like a very long time), it is likely that you’ll see the asking price of your home fall quickly, and it can even compromise your ability to remortgage your property.
Once you have 80 years remaining on your lease, very few mortgage lenders will be willing to lend against your property, meaning that those willing and able to purchase will be limited to cash buyers only. It will also cost much more to extend your lease if you let the term dip below 80 years.
What is lease extension?
Because your property becomes less valuable as your remaining term gets shorter, you have the right to extend the lease on your flat under the Leasehold Reform Housing and Urban Development Act 1993. Under the Act, you can extend your lease for a further 90 years at a ‘peppercorn rent’ – i.e. you won’t have to pay any ground rent. So, if you extend your lease when it has 85 years left to run, your extended lease would be for 175 years.
It should be noted, however, that if you allow the remaining term on your property to fall below 80 years before deciding to extend it, the process will cost much more due to a fee known as the ‘marriage value’. Essentially, this means that when you extend the lease, the freeholder has a right to be paid 50% of the value added to the property as a result of the lease extension. This could potentially run into tens of thousands of pounds, so it pays to start the process well before this point.
How do I extend my lease?
Lease extension can be a complex and expensive process, but it will significantly increase the value of your leasehold property. There are two ways of starting the lease extension process. You can take an informal approach and contact your freeholder directly to negotiate a lease extension. This works best if you have a good relationship with your landlord, and it can be much quicker and cheaper to achieve.
However, most leaseholders will have to seek legal advice and take the formal statutory route to lease extension, the steps of which are outlined below:
- You must check that you are eligible for lease extension. To be eligible, you must have owned your property on a long lease (i.e. with an original term of over 21 years when it was originally granted) for two years before you are allowed to extend your lease.
- You must instruct a solicitor who specialises in lease extensions. When taking the formal route, you are obliged to pay both your and your freeholder’s legal and surveyors costs. As such, you may be tempted to omit this part of the process and deal with the legalities yourself – but this is very much a false economy. Lease extensions can be highly complex, and without the support of an expert, you could end up without retaining your legal rights and ensuring the lease is legally capable of registration at the land registry.
- You must also appoint a valuation surveyor with experience in lease extensions to value your property and calculate the premium you must pay to extend your lease. You are responsible for both your and your landlords surveyors fees.
- To formally start the lease extension process, your solicitor must serve a ‘section 42 notice’, otherwise known as a tenant’s notice, on the ‘competent landlord’, who will usually be the freeholder. They will then have two months to respond with the terms they accept and reject.
- The final step will be to negotiate the wording of your lease extension. Your solicitor will be able to handle the negotiation process on your behalf. If you cannot come to an agreement on price or wording, your case will have to go before a tribunal, which can incur further costs.
What is involved in buying the freehold? Is this better than lease extension?
Under the Leasehold Reform, Housing and Urban Development Act 1993, leaseholders are entitled to join together and purchase their freehold for a fair market price. This right was further reinforced by the Commonhold and Leasehold Reform Act 2002. The process of buying the freehold is called ‘collective enfranchisement’. You’ll own a share of the freehold along with your fellow residents, and although you’ll still have a lease on your flat, you and the other residents who participate will be able to extend it for free.
Buying the freehold costs around as much as extending your lease but can be much more complex because you have to get at least 50% of the residents in your block involved. If the only reason you’re looking to buy the freehold is because of a short lease, it makes more sense to simply take the lease extension route.
However, some flat owners are trapped by unfair leases and expected to pay extortionate ground rent and service charges to their freeholder. They may also find that they’re being charged huge amounts of money for routine maintenance and services to their building. In this case, many residents take the path of buying the freehold, in order to take back control of their block and the money being spent on it.
As with extending your lease, you’ll still have to factor in legal costs and professional valuation fees, which will need to be considered before proceeding with either option.
Don’t leave it until the last minute
Whether you’re looking to extend your lease or buy the freehold, it can be a lengthy process and leaving it until the last minute could significantly impact the value of your home.
When you instruct the property conveyancing team here at Tees, we’ll deal with all the legal aspects of extending your lease, providing regular updates throughout the process and dealing with any problems that may arise.