The shorter your lease - the less valuable your property may be. Not only will your property become less valuable but there is also likely to be difficulty in being able to sell it or obtain a mortgage on it. However, if you keep an eye on the remaining term then you can quite easily maximise your investment.
It is possible to protect the value of your property by extending your lease. The cost of extending your lease and protecting your interest increases as your lease terms ticks away. It is therefore vital to know how long is left to run on your lease and what action you can take.
When is it time to act and why?
A lease is a contract that gives ownership of a property from one party to another for a fixed period of time for a periodic payment (rent). Original leases are usually for either 99 or 125 years.
Once you get to between 85 to 80 years remaining on your lease then the cost of extending your lease starts to creep upwards. The longer you delay taking action the more it will cost. Avoid financial pain by acting early.
The process of extending your lease involves paying a premium or compensation to the Landlord for granting the extension to your lease. The reason that this is sometimes referred to as a compensation payment is because the ground rent requirement will be reduced to a peppercorn (very low) rent or nominal ground rent.
Under 80 years left on a lease is not a nice place to be and the premium will rise sharply. This is because if there is under 80 years left on your lease then a “marriage value” also becomes payable.
Marriage value is the Landlords share (50%) of the increase in your property’s value that the lease renewal has created. It is the difference in value between your property with your current short term left and the new value of it with the extended term.
Your lease will be extended for a further 90 years on top of the amount of time still left on your lease.
Get the professionals in!
The cost of the premium that is payable can vary greatly and it is vital to get professionals on board to help.
It is hugely advantageous to obtain a professional valuation in advance of any negotiations regarding premium with your Landlord – there are many online calculators that will give you an approximate estimate as to what you may have to pay. However, a valuation from a professional surveyor can often hold great weight and can be relied upon throughout negotiation and beyond.
Each Landlord is different and will have a different approach to your request for a lease extension. Some lease extensions can be agreed in advance, particularly if you have a good relationship with your Landlord. However, sometimes there may even be the need for a bit of investigation to be done to clarify the identity and whereabouts of your Landlord.
In addition, to the payment of the premium – it is likely that you will also need to meet the cost of the Landlords professional fees ie their surveyor and legal fees.
There is normally a period of negotiation and/or the need for formal notices to be served and it is here where again, it is a big benefit to have professionals on board. Solicitors who regularly engage in this type of negotiation should be able to save you any unnecessary expense.
Is there any other option?
There is an alternative to individually extending your lease and this is to group together with other leaseholders in your development and buy the freehold. This is known as collective enfranchisement. For this process to get off the ground there will need to be at least 50% of the owners within your development who agree to purchase the freehold with you.
Once you own the freehold of your development then you gain full control of how it is managed and the expenditure. This alternative process may be more attractive if your development is not being managed well.
Check your lease
With a boom of apartment building in the Noughties now is the time that those 99 year leases will be entering the crucial zone. Check your lease today to limit costs of a lease extension and maximise your property’s value.
Laura Severn, Director at LMP Law