Now may be the time to renew your lease

Falling house prices make homes more affordable for first time buyers and that’s good news.   But it is pretty depressing for most existing property owners, with the exception of one group of homeowners for whom a drop in house prices actually saves them money – the millions of people who own leasehold flats.

Flats and maisonettes are usually leasehold, meaning that you own the property for a fixed period of time, but not the land on which it is built. Houses on the other hand are usually freehold, meaning you own the property and the land for an unlimited period of time.

The cost of extending your lease is a function of the value of the property and if the price falls, the sum you have to pay to extend your lease is lower too.  This is particularly important to those who live in London and the south east where the vast majority of properties are flats and apartments held on long leases. As prices fall there is a window of opportunity to increase the value of your property at a lower cost.

But why should you extend your lease?  Because the fewer the remaining years left on the lease, the more difficult it becomes for a potential buyer to obtain a mortgage and you can effectively only sell to those with cash.  This inevitably affects the value of the property.  Mortgage lenders like to see around 50 or 60 years remaining on the lease after the buyer has repaid the loan so if your lease is approaching the 80 years remaining mark, now could be a good time to extend the lease. 

As long as you have owned – but not necessarily lived in – your property for at least two years, the 1993 Leasehold Reform Act gave most leaseholders the statutory right to extend their existing lease for another 90 years, in addition to the unexpired term, at a peppercorn, or zero, ground rent.  The most notable exception is if the lease was originally granted for less than 21 years.

The price you pay the freeholder to extend the lease is based on the value of the property and if the flat is now worth 20% less than a couple of years ago, you should pay 20% less to extend the lease.  Hang on until the market improves and when you sell you should get your money back - and more.

‘If you have between 80 and 85 years left on your lease, our advice is take action now to extend it says Sally Trevaskis, who specialises in lease extensions with solicitors Cripps Harries Hall.  ‘Extending it after the remaining period falls below 80 years is more expensive because you are then affected by ‘marriage value.’

How much will it cost?

There is no absolute formula for working out the cost of extending a lease although there are guidelines and you will generally need professional help to negotiate the extension and comply with the legislation. 

So how much will it all cost?  ‘The tenant will have to pay the freeholders professional fees as well as their own, in addition to the cost of buying the lease extension.  Solicitors fees average around £1,500 plus VAT and the valuer will probably charge around £750,’ says Trevaskis.  But shop around.  There are specialist firms who may charge less and will deal with the whole procedure.  

The price you will pay for the extended lease reflects compensation to the landlord for loss of ground rent during the rest of the existing term of the lease, and for not receiving possession of the property at the end of the term to which he would otherwise be entitled.  Where the lease has less than 80 years to go, there is also 'marriage value'. 

The ‘marriage value’ is the potential increase in the value of the flat once the lease has been extended.  The legislation requires that this ‘profit’ is shared 50:50 between the leaseholder and the freeholder landlord. When calculating the marriage value the leaseholder and landlord's valuers will rely on local knowledge and experience to assess the increase in value in the flat arising from the grant of the new lease.

You will probably need a formal valuation from a chartered surveyor who specialises in leasehold enfranchisement as the basis of an offer to the landlord which is submitted with the leaseholder's Notice. A surveyor will be able to provide you with best and worst case estimates on the value of an extension, advise you on the amount of money you should offer the freeholder, and help you to negotiate an agreement.