Richard Cleminson is the professional services director at Kinleigh Folkard & Hayward
Mortgage brokers and leaseholders are unaware of the importance of reviewing the terms of the lease when it comes to arranging the finance or re-finance. It is really important to understand the pitfalls and opportunities of lease extensions.
The most immediate reason for extending leases is that a short lease can seriously affect the value of a property. For example, a flat with a lease of 100 years is worth roughly the same as a property on a freehold; however, that same flat on a lease of 60 years, could be valued at approximately 60% of the freehold price.
Now while in practice values are more likely to be worked out at the freehold price, minus the estimated cost of extending the lease, it is worth remembering that if a client waits until they have less than 80 years to go, buying an extension becomes more expensive as under 80 years, lease holders have to pay so-called Marriage Value (a compensatory fee to the landlord).
All this is important because the lease affects saleability. Most buyers will be scared off by a short lease, and, from the broker’s point of view, it may also become difficult to secure a mortgage from lenders.
In order to prevent this kind of difficulty, the Leasehold Reform Housing and Urban Development Act 1993 allows an individual lessee to extend for an additional 90 years at a zero ground rent. There is also a similar right for the lessee of a house but the maximum period is 50 years lease extension.
The basic qualifying criteria for a lease extension are that the leaseholder must have a long lease (ie not less than 21 years) of a flat or a house and must have owned the property for at least 2 years.
Clients will need the help of a surveyor to provide estimates on the value of the lease extension, advise on the amount of money to offer the freeholder, and help negotiate an agreement as well as a legal representative – either a solicitor or a licensed conveyancer, who will prepare the information for the application, serve the notice on the landlord, answer requests for information, and conveyance the new lease.
Is it worth doing? Well that depends on your circumstances but the Leasehold Advisory Service offer examples and advice to help guide people who may be considering this and it’s my guess they will be increasingly busy.
There are hundreds of thousands of flats that are going to require lease extensions in the future and many of these within the next five years. If you are looking to help any of those leaseholders refinance you will want to make sure their lease terms are in good enough shape to allow them to do so.