Although central London agents are reporting that prices in the prime areas are “softening”, flats and houses there, and indeed across much of the South East, remain expensive.
An often neglected and misunderstood way of adding value to a leasehold property can be by acquiring a lease extension but as so often in real estate professional advice is key. Here my Keystone colleagues Deborah Swanwick and Laurence Gray look at Short Residential Leases – How to Value Them and Extend them.
So, you’ve found the flat you want to buy, but the flat is held on a “short” lease or, as the more creative selling agents are now calling them, “mid-term” leases. Why does it matter if a lease is short or long? In contrast to a permanent freehold interest, leases are granted for a fixed, limited term and will get shorter with time.
The nearer a lease gets to its expiry date, the less valuable the lease becomes which is why leases are sometimes referred to as “wasting“ assets. A shorter lease should cost less than a longer one. Good news for a buyer? Not so simple, because a buyer will want to consider the cost of extending the lease and the premium payable for buying a lease extension rises exponentially with time; in other words the longer you leave it to buy an extension the more it will cost you.
The attraction of a short lease is that there will be a smaller pool of buyers for it. Less competition has to be a bonus for any buyer in today’s market. What is classed as a short lease? Start considering the short lease issues when your lease has fewer than around 100 years left to run. The premium payable for a lease extension starts rising steeply when the lease is below 82 years. Valuing a short lease and valuing the cost of a lease extension.
Valuation is a specialist matter. Selling agents may express a view, but it is extremely important that a specialist valuer, who is experienced in short leases and preferably in the same locality, is engaged to value and negotiate for you. Valuations of short leases and of the premium to be paid for an extension has its own specialised formulae which are different from general valuations. We can help refer you on to specialist valuers.
Will a short lease stop me getting a mortgage? It may do. As a general rule lenders require the lease to have at least 30 years to run in addition to the term of your mortgage. So, for example, the lease must have at least 55 years left to run if you intend to take a mortgage with a 25 year term. But each lender is different so do check the requirements of any specific lender you have in mind. Even if you are not purchasing with a mortgage, do consider the future marketability of the lease because at some point you will probably want to sell.
A lease below about 58 years will in most cases preclude buyers with a mortgage and will therefore restrict the property’s onward sale market to cash buyers. Any restriction in the onward sale market will lower its value.
How do I apply for a lease extension? In some cases landlords are willing to grant lease extensions and the value can be negotiated freely between the parties. However, in many cases landlords are not seeking to grant lease extensions. They are content to let the lease term reduce in the knowledge that as time goes on the cost to the leaseholder of the extension will only get higher. If the lease finally runs to the end of its term the landlord will be entitled to regain possession of the premises.
If a landlord is unwilling to negotiate a lease extension then the leaseholder can resort to claiming its statutory right to a lease extension of 90 years beyond the original expiry date of the lease under the Leasehold Reform (Housing & Urban Development) Act 1993 (“the 1993 Act”). The leaseholder will claim its right by serving a statutory notice and following the procedure under the 1993 Act. Under this Act, the leaseholder will be liable for the landlord’s legal and valuation costs.
Is a claim for an extended lease under the 1993 Act guaranteed? Yes. This is a guaranteed right, so long as the claim notice is in the correct form and so long as the statutory procedure is followed correctly. How long is the extended lease under the 1993 Act? Your statutory right is to an extra 90 years in addition to the remaining term.
Do I need specialist solicitors? Yes, you do. If the requirements of the 1993 Act and its procedure are not followed correctly the leaseholder may lose their right to claim for a further 12 months. The provisions and procedure under the 1993 Act are complex. This is why it is important to select a solicitor who is specialised in dealing with the 1993 Act and will be competent to follow the complex procedure correctly.
Does every owner qualify to get an extension of the lease under the 1993 Act? Not immediately. A minimum 2 years’ ownership is required before you can apply for a lease extension under the 1993 Act. However, the cost of the extension will have gone up during the 2-year wait.
Is there any way to avoid the 2-year wait to qualify to claim an extended lease? Yes. So long as the seller has owned for at least 2 years, the seller can serve the statutory notice to claim a lease extension in the seller’s name just before completion of the sale. In addition, the sale contract should provide that the seller’s right to claim the extension is assigned by deed to the buyer on completion. In this way the buyer steps into the shoes of the seller for the purposes of claiming a lease extension, as from completion.
What happens if the parties cannot agree upon the premium or the landlord’s costs? If the premium cannot be agreed, either party has the statutory right to refer the issue of cost to the First Tier Tribunal (Property Chamber). Happily this occurs in only a small minority of cases. The Tribunal can also be used to determine the valuation and legal costs of the landlord which the leaseholder is required to pay, if those costs cannot be agreed upon.
What happens in a probate sale? So long as the deceased had owned for at least 2 years, the Executors can claim a lease extension under the 1993 Act from the date of the Grant of Probate and for 2 years thereafter. The same right applies for Administrators from the date of grant of Letters of Administration.
In conclusion, when it comes to extending residential leases there are many factors to be considered both from the leaseholder and landlord perspective, which is why it needs specialist legal advice. If anyone has any questions or would like to find out more about how to extend their lease they can contact the authors via the links listed below.
About the Authors
Deborah Swanwick and Laurence Gray are both Consultant Solicitors at Keystone Law. Laurence Gray is also a certified mediator.