If your lease expires, your property will eventually revert to the freeholder, your landlord, leaving you empty-handed. However, if you have lived in the property for more than two years you have the right to extend the lease, but the longer you leave it the more expensive it gets.
Victorian properties that were converted in the Eighties and a 99-year lease granted in 1980 will by now have only 67 years left to run. The cost of extending leases on flats and maisonettes built or converted in the Fifties and Sixties meanwhile soars, as the prospect of the property returning to the freeholder gets nearer.
The most important trigger point for diminishing leases is at 80 years. This is because the formula for calculating how much you must pay for a lease extension is considerably more favourable towards the freeholder when there is less than 80 years left to run. Where there is less than 80 years left, in addition to compensating the freeholder for the delay in getting the property back, the home owner also has to pay the freeholder half of the increase in the lease’s value that results from the lease extension, which is not the case for leases of more than 80 years. This uplift in the lease’s value caused by the extension is called the ‘marriage value’.
Leases of less than 60 years face the additional problem that they become increasingly difficult to market as many lenders will not grant mortgages where there will be only 30 years left on the lease when the mortgage is paid off. A prospective purchaser of a property with a 55-year lease, for example, would struggle to secure a 25-year mortgage, meaning the number of potential purchasers of the property would be limited.
The ‘marriage value’ gets greater and greater as time goes by, pushing up the cost of extending the lease. According to figures from Mike Tibbatts & Co, the example of a flat worth 300,000, with a ground rent of 25 a year, in suburban west London. With 80 years left, a 90-year extension would cost 6,000, depending on the area and type of property,. For a 79-year lease, the cost of that extension rises to 9,000, because the marriage value is now payable. If the lease has 70 years left, the cost is 18,000, rising to 30,000 if it has only 60 years left, and 50,000 where there are only 50 years left.
The method for calculating leasehold extension premiums is complicated and influenced by a number of disputable factors, making the process seem more of an art than a science. These factors include local property prices and predictions of future investment returns, which are used to calculate the sum you would have to give the freeholder to compensate for his not receiving the property back for several more decades. You normally have to pay your freeholder’s legal costs, your own legal costs and surveyors fees, which typically total between 4,000 and 5,000.
To extend your lease, you must have owned the property for two years and the lease must have at least 21 years left to run. You are entitled by statute to a 90-year extension, although your freeholder may agree to a different term.
Here is how the remaining term on the lease should impact on your purchase decision:
100+ Years remaining: If there is more than 100 years remaining on your lease, go ahead with the purchase; you don’t need to do anything at this stage.
95-99 years remaining: You’re OK to buy. But consider extending your lease at some point to get the full value of your property when you do eventually sell-up.
83-94 years remaining: Caution: a relatively low remaining term on the lease; And you should expect to see the asking price of the property slightly reduced for that reason. Depending on how long you stay in the flat, you’ll likely have to extend the lease yourself at some point, that will take time and cost money. You should find out the ballpark cost of extending the lease and factor this
into the amount you pay for the property.
70-82 years remaining: Once the lease is down to 80 years (82 yrs in practice for new owners, see below) there is an additional cost to extend, called a Marriage Fee. The previous owner has been remiss in not extending the lease earlier, a lease extension at this stage will incur Marriage Fees which could be significant. The property should be available at a discounted price for this
reason.
50-69 years remaining: You will have difficulty getting a mortgage to purchase the property and difficulty selling-up for the same reason. Again, the burden of extending the lease will fall on you and with high Marriage fees, it’s likely to be expensive; buyer beware.
Alan Holmes
