Having a short lease remaining on your property is going to have a severe detrimental effect on the market value if you decide to sell. It is estimated that a flat with a lease with 99 years or more to run is worth roughly the same as an equivalent freehold property but if the lease has 60 years remaining then you could well be looking at a value that is only 80% of the equivalent worth of a freehold property.
Short lease problems
There is little doubt that a buyer can be deterred from bidding on a property if it only has a short lease remaining and another common problem is that many lenders will not be prepared to offer a mortgage in these circumstances. Buying an extension becomes more expensive when a lease has a term of less than 80 years remaining. A calculation is made using what is often referred to as a “marriage value”, which is calculated by deducting the value of the property before the extension from the value it has afterwards plus the value of the landlord’s interest. Whichever way you look at it, a short lease is going to cause financial and also possibly legal complications depending on the duration remaining.
Your rights as a leaseholder
In most situations a leaseholder would normally have the right to extend the lease by another 90 years once they have surpassed the qualifying period of owning the existing lease for a period of at least 2 years. There are certain rules to follow which your solicitor or legal representative should provide assistance with and you will of course have to pay all the legal fees involved in the transaction.
Extending the lease
Having established that you are in a position to apply for an extension to the lease based on the term remaining and how long you have already owned the existing lease you should give written notice to the freeholder as soon as possible. If you are considering buying a property that has a short lease and wish to extend before exchanging contracts then you should ensure that the existing owner and seller serves the initial notice on the landlord before you proceed to an exchange. This extension notice can then be assigned to you on completion and the two year ownership rule will no longer be applicable.
Giving written notice to the freeholder
When you or your legal representative give initial notice in the form of a formal written request this will officially start the process that will enable you to apply for an extension. You should include your name and address details together with details of the existing lease including information such as when it was originally granted and how much ground rent you currently pay. Supplying this information and as much detail as possible which is relevant, will greatly speed up the process and you should also include evidence that confirms you meet the qualifying criteria to request an extension. It’s also advisable to suggest a deadline for when you expect to receive a response but bear in mind that the allowed response time is not less than 60 and suggesting any less would constitute an invalid notice.
Response from the freeholder
Once the freeholder replies, each partys’ appointed surveyor can hopefully negotiate an acceptable renewal. They can only reasonably refuse your request if they think that you do not have the right to extend or if they want to demolish or redevelop the property. They can also refuse an extension if they say that they or a relative want to live in it in the near future. There is a legal challenge that can be mounted against these arguments and you should apply for a court order within six months to allow a court to decide the outcome. If they agree that the freeholder should not grant an extension then you will be entitled to compensation in that situation.
As you can see there are many compelling reasons why you should apply to extend your lease as soon as the situation allows you to do so and any delays will have an effect on the market value of the property. If you are buying a property on the basis that the lease is going to be extended then do not exchange contracts until the current owners have initiated the extension process.
As an existing owner or a potential buyer, having a lease which has less than say 90 years to run is going to start costing you money so act quickly to put it right.