Is now the right time to extend the lease on your home?
If your home is leasehold, you could soon find it cheaper and easier to extend the term of your lease. This will usually make your property more valuable and, depending on how many years your lease has left, it can also make it easier to remortgage and more marketable when you come to sell.
As part of its reform of the leasehold property regime, the Government plans to improve the statutory mechanism for lease extensions. Here Christine Blenkinsop a Conveyancer in the residential property team with Kidd and Spoor looks at the latest proposals and considers your options if you are a leaseholder.
If you purchased a house or an apartment on a leasehold basis then, unlike with a freehold property, you do not own it outright. Instead, you have the right to occupy for a specific number of years (the term) and over time the term will decrease. Effectively the property is a wasting asset as, discounting the impact of house price inflation, your home’s value will also go down.
How many years left on your lease?
When there are many years left on your lease, this may not make much difference in practice.
However, many mortgage lenders require a minimum term of 75 years, and the cost of extending a lease term can increase substantially when it dips below 80 years.
Buyers want to be confident they will be able to remortgage or sell on without any problems. So, issues can start to arise when a lease has fewer than 90 years left.
Your right to extend
As a leaseholder, you probably already have a legal right to extend your lease.
- If you own a flat – this will be for an additional term of 90 years, and you will only have to pay a nominal ground rent.
- If you own a leasehold house, then different rules apply. Any extension would only be for 50 years, and you will have to pay what is called a ‘modern ground rent’ which will often be higher than the existing one.
If you own a flat, you will have to pay a premium to your landlord, and the law sets out the basis for its calculation. This payment reflects the value transferred from your landlord to you. Your landlord will lose the right to ground rent and will have to wait longer to get the property back. You will not have the ongoing cost of ground rent and will have a longer more marketable lease.
Significantly, if your lease has less than 80 years left, the premium valuation will also include an element of ‘marriage value’. This represents the difference between the value of your leasehold property before and after the extension. Generally, its inclusion will increase the price you have to pay. The shorter the term is, the greater the marriage value will be, and the more your lease extension will cost.
Valuation is a complex area, as is the procedure for agreeing the price with your landlord. You will need to factor in your lawyer’s and surveyor’s fees and pay some of your landlord’s costs.
It is important to be clear about what is involved and what you want to achieve. Your solicitor can explain the process and help you to decide whether it would be a good move for you.
Changes in the pipeline
Recently the Government has said it plans to make leasehold ownership ‘easier, faster, fairer and cheaper’. This includes legislation to help owners extend their leases via several measures:
- a simplified single process will apply to owners of both leasehold flats and houses, reducing the costs and time involved;
- a right to extend leases more than once;
- rights to extend for a much longer term, up to 990 years;
- a change in the basis of valuing any premium, including capping ground rent and abolishing marriage value; and
- introduction of an online calculator to simplify calculating the premium.
The current proposals lack detail, but the potential savings for those seeking to extend their lease could be significant under the new regime. Removing marriage value from the calculation of the premium alone could make it much cheaper to extend a short lease.
The timetable for change
If you are considering extending your lease, you may be tempted to wait for the promised reforms. However, there remains a lot of uncertainty over their extent and timing. The Government has indicated it hopes to bring forward the necessary legislation before the next general election in 2024, but even that date could slip if priorities change. The proposals will also be subject to parliamentary debate and detailed scrutiny, which means they could end up being less far-reaching than some would hope.
What is right for you?
When, and whether, to extend your lease is a very personal decision.
For example, if you own a flat and the term will shortly reduce to 80 years, you may not want to delay. Once the term dips below 80 years, the premium must include an element of marriage value, so you will have to pay your landlord more.
On the other hand, if you have a shorter lease, and no immediate plans to remortgage or sell, you may decide to wait and see how any potential reforms could benefit you.
How we can help
Our residential property solicitors are experienced in leasehold extensions and can explain what is involved and help you assess all the pros and cons. By understanding your individual circumstances and goals, we identify the best course of action and may even suggest creative alternatives. For example, negotiating a lease extension directly with your landlord rather than relying on your statutory rights is one alternative, while another would be purchasing the freehold.
Whatever stage your plans are at, however many years are left on your lease, talking things through with your solicitor will help you reach the decision which is right for you.
