Do you know the length of your lease?

In general terms, the longer the lease the better, and those with more than 100 years remaining are not normally a problem from a valuation perspective. Legislation states that where the lease has less than 80 years remaining, the payment to the landlord will have to include 50% of the ‘marriage’ value (explained in more detail below) when the leaseholder acquires a lease extension under the 1993 Act. Further, the majority of mainstream mortgage providers, as a rule, refuse to lend to a purchaser on lease terms of less than 55 years, so anything shorter will only be available to buyers who are paying 100% cash.

WHAT SHOULD YOU DO FROM THE OUTSET?

Check the length of your lease. The Leasehold Reform, Housing and Urban Development Act 1993 enables tenants to extend their lease by 90 years, in addition to the unexpired term at a peppercorn ground rent (ie nil), in return for a premium.

WHY EXTEND?

As the length of the unexpired term of a lease gets shorter, the premium payable to extend increases. If a lease has less than 80 years unexpired then marriage value is payable to the landlord, which could be significant. A tenant may also encounter difficulties if they want to sell their flat and the unexpired term is considered un-mortgageable.

HOW DO I QUALIFY?

To qualify for a statutory lease extension, the flat must be held under a long residential lease (ie originally granted for a term of more than 21 years) and the flat must have been owned for more than two years.

WHY 80 YEARS?

Marriage value is payable when the lease has a term of less than 80 years left. The concept of marriage value is that the total value after extension is worth more than the sum of the landlord’s and tenant’s interests in the same property pre-extension. The 1993 Act requires that this uplift is shared equally between the landlord and tenant.

HOW IS IT CALCULATED?

Compensation is payable to the landlord for the diminution of his interest. This comprises the loss of ground rent for the remainder of the term, plus the reversionary value of the property once the lease expires. The reversionary value is the value of the right to recover possession of the property at the end of the lease term. Where the existing lease has less than 80 years left the landlord is also entitled to half the marriage value.

HOW DO I SELL A FLAT WITH A SHORT LEASE?

If a qualifying leaseholder is selling a flat it is possible to serve a Section 42 notice for a lease extension, and then assign the benefit of the notice to the buyer on completion. This helps greatly when selling a property, but it is essential that the buying party engages specialist enfranchisement advisors, as any mistake can be fatal for the claim.

Service of a notice upon the landlord is usually undertaken after exchange to ensure the buyer is committed. The parties execute a deed of assignment of the benefit of the notice (which can be included in the transfer of property). The deed enables the buyer to step into the seller’s shoes on completion and continue with the lease extension process.

WHY BUY A SHORT-LEASE PROPERTY?

There are many reasons to buy short leasehold property. By using the 1993 Act the purchaser can spread his or her capital payments across two transactions, which in itself can save Stamp Duty Land Tax, as the tax is paid per transaction and not in aggregate.

Ideally a prospective buyer is looking to buy a flat where the seller has owned the lease for more than two years. They would otherwise need to wait two years should they decide to extend the lease after buying the property

Many tenants do not realise the length of their lease until they attempt to sell or re-mortgage their flat. Short leases affect the value and saleability of a flat, and can cause issues with mortgage lenders – so check the length of your lease!

Katie Cohen, consultant at Bircham Dyson Bell LLP