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Lease extensions for flats

Many of the flats built after the Second World War, and indeed more recently, were sold on 99 year leases. Consequently they may now have less than 60 years remaining. On the face of it, this may not appear a problem, but it can create difficulties on resale and also affect the value.

Mortgage lenders normally require the lease to have about 40 years remaining after the mortgage has been paid off. As most mortgages are for 25 years, lenders are looking for 65 years or more on the lease.

However, the Leasehold Reform Housing & Urban Development Act 1993 gives leaseholders, subject to certain qualifications, the right to extend their lease by another 90 years on top of the current unexpired term.

The freeholder can require payment for extending the lease to compensate for their loss. The amount is usually made up of the following criteria:

  1. The capital value of the ground rent income.
  2. The reversionary value, i.e. the amount of money which needs to be invested today to accumulate to the current market value with a long lease, when the existing lease ends.
  3. The Marriage Value – this is the most complicated element of the calculation and is broadly this is the difference between the market value with the benefit of an extended lease and its current value with a short lease. When a lease only has 50 or so years left, the difference can be significant and will continue to increase as the lease term reduces. The freeholder is entitled to half of the Marriage Value. So, the sooner a leaseholder applies for an extension the better. The Commonhold and Leasehold Reform Act 2002, however, does not allow the freeholder to receive any share of the Marriage Value if more than 80 years remain on the original lease. Although there should not be any problem selling a flat with, say, 75 or 80 years left, it usually makes sense to consider applying for a lease extension before the term reduces.
  4. Other Compensation – this is to compensate the freeholder for any other loss, such as future development potential, commissions on insurance premiums etc.

Prior to the 2002 Act, a leaseholder needed to have owned and occupied the flat for a minimum of two years before applying for an extension. Now, provided you have simply owned the flat for a minimum of two years you should be able to qualify. This concession is to help overcome the problems that many investors would encounter with “buy to let” flats.

The procedure for applying for an extension is set out in the Act, but this is not the place to go into the detail. However, if the freeholder rejects the offer proposed by the leaseholder, the matter can be referred to the First-tier Tribunal to determine the amount payable. Inevitably this takes some months, which is a good reason to consider applying for a lease extension before you are about to sell. Often the problem with short lease terms only becomes apparent when a purchaser has been found, which can result in delay and perhaps extra cost. The consequence of this is that you may end up having to pay the freeholder more than you really need, to avoid the delay of applying to the First-tier Tribunal and to keep hold of your purchaser.

Contact McNeill Lowe & Palmer, Chartered Surveyors for further advice and guidance.

 
Tim Palmer

Tim Palmer

Tim has enjoyed a career in the property business covering Hertfordshire and Bedfordshire for over 30 years.

Tim's full profile | Our Team

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Category Residential