There is no clear guidance as yet as to how the recent changes in SDLT will affect lease extension. The question still remains, irrespective of SDLT, as to whether the extension of a lease is still a good idea?
This is a common question in conveyancing “how do go about extending my lease on my property?” Most people looking to sell a leasehold property find out fairly quickly that if the length of their lease is low it can significantly affect the sale price
The general view is the shorter the lease, the less the property is worth and the more expensive it can be to extend. Buyers usually look for properties that have a minimum of 95 years; anything below may put off potential buyers. A flat with a lease of 100 years is worth roughly the same as a property on a freehold. A flat on a lease of 60 years, could be valued at approximately 60 per cent of the freehold price. The bottom line is that the sooner you act the less expensive it is.
What is a lease?
A lease simply means the right to occupy a property (usually a flat) for a period, which is usually at 99 or 125 years. At the end of this time, although you can stay on as a tenant, the freeholder will own your property. You might think I wont be around in 50 years or so but that doesn’t mean you might not want to sell your property at some point. If you ignore the issue now then you will have to address it at some point or you risk losing a sale.
When is a good time to think about extending the lease?
If a lease has less than 80 years unexpired when you seek to extend it then as part of the price you will have to pay what is known as a marriage value to the freeholder. This could be significant. It is a key reason why you should consider extending sooner rather than later.
If you want to sell your flat if the unexpired term is less than 50 or 60 years you may have difficulty in finding a purchaser. Mortgage providers are not happy to give you a mortgage if have a lease that has less than 50 or 60 years to run. Different lenders have different criteria but they are generally looking for an unexpired term of at least 60 years. Some points to consider:
However, you need to be aware that you can’t force the freeholder to extend a lease if:
Do I Need To Involve a Solicitor?
After insuring that you are eligible for getting an extension, you should contact a solicitor. A solicitor will handle all the legal documentations for extending your lease. The solicitor will start the process by serving an Initial Notice on the landlord, which will offer a premium for the lease extension. In the process of extending the lease some of the stages have strict time limits. It is very important to instruct a solicitor who is familiar with the legislation. It’s best to get a recommended solicitor that has a strong history in this specific field. It worth shopping around and getting several quotes.
How Do You Value a Lease Extension?
Firstly, a valuer, usually a chartered surveyor, is needed to put a value on the lease extension. I say “needed” because it would be extremely unwise not to have a valuer specialising in this field. There is a set valuation formula for arriving at an initial figure but like with most things there will be some negotiation. Again it is worth looking around for a local surveyor who specialises in lease extensions and getting several quotes in writing. The majority of surveyors will charge a fixed fee to prepare the report. This fee should cover the initial inspection of the property, reading the lease and making all the calculations.
A surveyor and negotiate with the landlord or their agent on your behalf and will charge more for this or for any further work required if the valuation cannot be agreed.
Negotiating With the Freeholder
The owner of the freehold will be given a minimum of two months in which to respond to an offer and if he/she does not, then action can be taken by applying to the County Court for an order that the lease extension be granted on the same terms set out in the initial notice.
Usually the Counter Notice is served in time and a period of negotiation follows between the parties or their respective surveyors.
You should also remember that whilst the law will ultimately be on your side when extending a lease, if a freeholder wants to be difficult they can drag the whole process out for ages. The freeholder can still suggest a high figure on the basis that it will take you quite a bit of time and money to challenge it.
What Happens If We Can’t Agree A Valuation?
If an agreement is not made on the valuation then the deal could end up in the Leasehold Valuation Tribunal. However, that is quite unusual.
An application to the Leasehold Valuation Tribunal must be made by the flat owner (i.e. the lessee) no later than six months from receipt of a valid counter notice, failing which, if the premium cannot be agreed within the six month window, the initial notice is deemed withdrawn. This means that the lessee will have to pay the landlord’s reasonable legal and surveyor’s fees in addition to his/her own costs and wait for a further 12 months before being able to make a fresh claim under the Act.
This will be costly for the lessee, especially if waiting a year results in the lease term dropping below 80 years! If the applicant meets the criteria by law the freeholder cannot prevent extension of the lease.
Once the Initial Notice is served on the freeholder, then the applicant will become responsible for the reasonable valuation and conveyancing costs. The Notice is also important in setting the valuation date.
The Leasehold Advisory Service gives an example of a flat with a 68 year unexpired lease, on a ground rent of £50 pa, with a current value of £150k, and an improved value £165k. An extension of 90 years is likely to cost £8,250. But the same property, on a lease with only 35 years to run, could set you back a whopping £55,368. However, if the current lease is 95 years (and, therefore, attracts no ‘marriage value’) the cost of an extension would be only around £734.
It’s important to note that the leaseholder is liable for both parties’ legal and valuation costs, unless the matter ends up at the Leasehold Advisory Service, who may apportion the costs differently.
Although it may be an expensive business, remember that you are adding value to your property, and, in addition, you will no longer have to pay ground rent.
How Long Does it Take?
Subject to how efficient you are, plus your freeholder, his solicitor, your solicitor and your surveyor, this whole process could take from 3 -12 months – unless of course it lands up in court because you cannot agree values. However, there are legal timelines in place to prevent the process from dragging on.
Please note that this is a guide and there is no substitute for sound legal advice. Purchasing a lease extension is not cheap and there can be pitfalls. If you negotiate directly with the freeholder you have to remember that he/she is looking for the best deal for themselves.
If you would like expert advice on conveyancing matters including lease extension then contact Shakeel Mir on 020 8899 7336 or email him at firstname.lastname@example.org