In general terms, the longer your lease, the more your property is worth, but extending the lease is a costly exercise.
If you own a London flat, the chances are it’s a leasehold property. This is the most common form of flat ownership in England and Wales. It means that while you own your own property, you do not own the building, but are renting it for a fixed period. When you decide to sell the flat, the lease is transferred to the buyer.
No matter how happy you are with your home or investment property, it is likely that you will wish to sell it at some point in the future. When you do offer it for sale, the length of your lease will have an impact on its value.
A short lease will seriously reduce the value of the flat and could mean that you can only sell it to a cash buyer. This is because most lenders will not offer mortgages on properties where the lease is for less than 60 years. In addition, they will usually charge higher rates for mortgages on properties where the time remaining on the lease is less than 70 years.
The good news is that under the 1993 Leasehold Reform, Housing & Urban Development Act, flat owners are entitled to a 90-year extension to their lease at a fair market price, as long as they have owned the property for at least two years.
When should you think about extending your lease?
In general terms, the longer your lease, the more your property is worth, but extending the lease is a costly exercise. The costs you incur may be more than the rise in the value of the property that results from extending the lease.
However, if you are looking to sell, a long lease could be the benefit which persuades a prospective buyer to choose your property over another.
What is the marriage value?
As the number of years left on a lease begins to diminish, the value of the property can be affected. When your lease has less than 90 years left, you should think about negotiating an extension.
A lease with less than 80 years remaining will become more expensive to renew. When such a lease is extended, the freeholder is entitled to half of the increase in the value of the property, as well as the fee for extending the lease. This is known as the ‘marriage fee’ - because it marries two costs together.
Your freeholder may be hoping you will allow your lease to fall to 80 years or less so they can enjoy a significant windfall. If your lease has around 83 years left to run, the time to act is now.
What costs will you incur when you extend your lease?
The costs of extending your lease will depend on both the number of years remaining on that lease and the value of the property.
The total cost will be made up of the actual cost of the extension, plus the professional fees involved and the land registry fees. You will have to cover your own legal and valuation fees and those of the freeholder.
The cost of the extension is calculated by assessing the financial loss incurred by the freeholder in granting the extension. This will depend on several variables including the ground rent being charged, other terms in the lease and the market value of the property.
It isn’t possible to provide an accurate estimate of the costs you will face when extending your lease, as these will vary dramatically according to the unique circumstances associated with each flat.
However, you can typically expect to pay a total of £7,500 to extend the lease of a flat[GU1] valued at £200,000 which has 95 years remaining on the lease. The costs could rise to £8,500 if the lease has 85 years remaining and to £26,500 if there are only 60 years remaining.
It is important to remember that the potential gains, in the shape of a rise in the value of your property, won’t necessarily be greater rate than the costs of a lease extension. In other words, it is relatively inexpensive to extend a 95-year lease but doing this may not increase the value of the property by very much, if anything.
Extending a 60-year lease could result in a dramatic increase in the value of the property. But you will have to pay the freeholder half of the potential gains if your lease has less than 80 years remaining when you extend it.
Should you seek professional advice?
Determining the cost of a lease extension requires a complex calculation - and often a subjective one as it is likely to be open to negotiation.
It is worth enlisting the services of a valuation surveyor, who specialises in lease extensions, together with a lease extension solicitor as soon as possible. Their expertise and advice could save you a great deal of money overall.
Could you purchase the freehold?
If you wish to extend the lease on your property, it could be beneficial to buy the freehold instead. Under the Leasehold Reform, Housing and Urban Development Act 1993 leaseholders have the right to collectively buy the freehold of their building providing they meet certain criteria.
You would then own the property outright, but you will need the agreement of at least half of the leaseholders in the building.
It is certainly worth exploring, but you will need to weigh up the costs and potential benefits before proceeding.
Extending a lease is not simple and is likely to be costly. Before you proceed, it’s important to seek the advice of experienced professionals. The could help you avoid an expensive mistake as well as helping you achieve the best possible deal.
As a central London estate agent operating from Knightsbridge and Marble Arch, Plaza Estates specialises in leasehold properties. For more information about buying or selling leasehold or to view our properties, contact us