LEASEEXTENSIONS eXtenDinGYoUrleASeWHAT’S THE COST? AeneAnconvAlliSmAurISmOSELIENuLLA


Useaprofessionalvaluer to calculatethecost of yourleaseextensionandhelpyounegotiatethe rightdealwithyourfreeholder, says BenSmith


Since the receSSion, banks have been less inclined to provide mortgages for property with shorter leases and somelenders are nowonly providing finance for homes withmore than 80 years remaining. I have had many vendors cometomewho have foundabuyer,but thedealhas fallen through due to the short length of the lease. So if youwant to sell your flat and it


has a short lease,what should you do? The vital first step is to get a valuation – this will give you the information to explain to your buyer howmucha lease extensionmaycost and that cost can then be incorporated into the purchase price. Choose a valuerwho is amember


of the Royal Institution of Chartered Surveyors (RICS). Aswell as giving you an indication of cost in the formof a valuation report, he or she will also guide you through the legal process and help younegotiate with your freeholder tomake sure both partiesare gettinga fair deal. Before youcan


serve notice on the freeholder, forcing themto extend your lease, the law states that youmust haveownedyour property formore than two years. This means that once the property has changed hands, your buyerwould notbeabletoextendfor two years, so the thing to do is to serve notice on exchangeofcontracts and then assign the right of the notice to the buyer. This allowsthe buyer to continue the process once the sale goes through. Aswell as assessing the total value of your lease extension, a good valuer workingalongsidea solicitor, should be able to assist with serving notice, receiving a counter notice and negotiating a final premium. So howmuch will all


this cost and howis it calculated? As an example, consider a flat with 70 years remaining on the lease


48


with a ground rent of £10 per year. The calculationtoextendthislease consists of three elements: nground rent income; nreversionary interest; and nmarriagevalue. The ‘ground rent income’ is the


incomestreamof £10 for 70 years and the value of this incomecan be calculated usingacapitalisationrate, which estimates future value. If youdonot extend thelease,then after 70 years the flatwould ‘revert’ back to thefreeholder. Thevalueofthis ‘reversionary interest’tothe freeholder is based on the value of the flat and that,given thechoice,wewouldrather be given £10 nowthan in 70 years time. To take accountofthis, valuersapply a capitalisation rate to the value of the flat.


By extending the 70 year lease for,


say90years (toatotal of 160years)you areessentially ‘marrying’ theexisting leasetothe newlease.Thisresults in an increase in the value of the flat which is known as the ‘marriage value’ and is the third part of the


calculation. By law, themarriage valuemust be split 50:50 between the leaseholder and the


freeholder if there


are less than 80 years remaining on


thelease,sothatboth partiesbenefit. As far as lease


extensions areconcerned, 80 is themagicnumber. Every leaseholder should


beaware that if your lease drops a single day below that 80 year threshold it couldDOUBLE the premiumpayable if you decide youwant to extend it!●


BenSmithisamember of the royalinstitutionofchartered


Surveyors andisaDirector of Allen&Smithchartered Surveyors,withofficesin NorthWest London,South East London andBerkshire tel 01491 875828 email info@ allensmithsurveyors.com Websitewww. allensmithsurveyors.com


assessing the total value of the lease


Fromthe freeholder’s perspective


purchasingafreeholdinvestment canbe expensiveand buildingmanagement canbea significantburden. Forthisreasonfreeholders expectahealthy return on theirinvestments. This iswherethe freehold /leaseholdsystemis controversial because the two are linked and areturntothe freeholdermeans acost to the flatowners. Oftenthemain source of income for freeholders is in lease extensions and it is this elementthatisoften controversial. It is here that thelessee’sinterestsand thoseofthe freeholdermost obviously clash.


Beware short leases What is so often forgotten by flat buyers is that it is just alease that is beingpurchased not bricks andmortar. Thelease is adiminishing asset and as the term reduces so does the value. Theshorter thelease becomes,the greaterthe cost to the leaseholder of extending and the greaterthe valuetothe freeholder.For this


under80years will be difficult to sell


reason freeholdersgenerally have no incentive to encourage flat owners to extend. Potential buyers of flats andcurrent flatownersmust thereforemakethemselvesaware of thelength of their own lease and the cost of extending it. As aruleofthumbanything under80years is considered ‘short’ but really even if your lease is approaching85years youshouldstart to make enquiries. There are two linked problemswith a


shortlease:First,anythingunder 80 years will be difficulttoselland anything below70 yearsmight notevenqualify foramortgage, limiting themarketdrastically.The second problemisthe cost of extending,which usuallyruns into thousandsofpounds andincreases (sometimes dramatically) as thelease term runs down.The keyisto make yourself awareofany potentiallease length issue andfaceuptoitearly before thecost becomes unaffordable.Fortunately leaseholders do nowhaverightsand there is a wealth of advice available, for example theLeaseholdAdvisoryServicewhichcan be easily accessedonlineatwww.lease-advice.org is an excellent resource. In thepastifalease hadfallenbelow 80


years the freeholder had flat owners over abarrel. Shortlease flats couldbecome virtuallyun-saleable withoutalease extension and the freeholder was free to namehisprice on extensions or refuse to extend at allwhilethe cost rose inexorably. This wasrecognisedtobeinequitable and theLeaseholdReformAct waspassedin1993 giving leaseholders theright to extend their leasefor afairprice.Under thesameAct groups of leaseholders in blocks of flats were giventhe righttobuy outtheir freeholder completely bywhat is knownascollective


Autumn2011 Flat Living Anything


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