Why should I extend my lease?

Let me introduce you to Katie and James.  When they found out that Katie was pregnant, they decided to put their beautiful period flat, in leafy Tunbridge Wells on the market.  They’d lived there for five years in absolute wedded bliss.  They upgraded the kitchen and bathroom and were looking to make a handsome profit.  They wanted to move to a house with their own garden, near a park and pub – village life - and they hoped to move before their baby was born so that they could decorate the nursery.  They had a lovely vision of starting family life in their new home.

The flat received lots of interest when it went on the market and an offer was made very quickly.  They agreed and thought that everything was going to plan. Until conveyancing started.

That’s when they were reminded that they were leaseholders and not freeholders, and their lease had only 80 years left on it.  Sounds like a long time but in lease terms, it’s not long enough.  Their buyers walked away.

What is a leaseholder property?

As a lease holder, you lease the property from the freeholder.  Yes, you own your property, the deeds are in your name and you’re paying the mortgage, but you are just ‘renting’ the bricks and mortar from the freeholder.

This arrangement happens up and down the UK and is perfectly normal and, importantly, legal.  If your property is leasehold, when you bought it, this should have been covered but like Katie and James, you may have forgotten so it’s worth checking.  Leases have a lifespan of decades and should always have at least 100 years left on them.

Leases can be a tricky business so it’s definitely wise to check.

Despite the big numbers we’re talking about, every year that the lease end date draws closer, the value of your property is negatively impacted.  In other words, the leasehold interest is a depreciating asset. I know that 80, 90 years still feel like a really long time away, but they’re not long enough and a lease of that length will reduce the potential sale price.  

So when you start asking, why should I extend my lease, here are my thoughts.

1.       Protect the value of your property.

By extending the lease on your flat, you’re at the very least simply protecting the value of it.  But …

2.       Value of your property

A property that has a lease of 100 years or less won’t be as valuable as the same property with a longer lease.  It may seem ridiculous that, say, ten years on a lease could make so much difference but that’s how the world of leases work.  Extending your lease could actually add value to your flat - critical in a competitive housing market, giving you the edge.

3.       The ‘mortgage-friendliness’ of your property

Lease length is important enough to make it a factor for mortgage lenders.  When mortgage lenders consider buyers and their prospective purchase, they’re looking at the ‘health’ of a property.  A ‘healthy’ lease length gives lenders that confidence and so they’re more likely to hand over the money. 

Let’s return to Katie and James at this point. 

They needed to extend the lease urgently and they had questions.  

How do I extend a lease?

When you extend the lease on your property, you are, in effect, forcing the freeholder to sell you an extension.  They will oblige and it’s a statutory process, but it can take anywhere from 4-12 months, depending on all the players involved.  For more detailed steps, click here.  

Can any homeowner extend a lease?

No, not all homeowners can extend a lease.  The original lease needs to be in excess of 21 years; you need to have owned the flat for at least two years and it must be a residential property rather than a commercial one.  For additional required criteria, click here.

When should I extend the leasehold?

From experience, I would recommend that you extend when your lease has less than 100 years left on it.  This seems to be the sweet spot for lenders and property owners but if you’re lease has 105 years on it and you want to achieve a good sale price, go ahead and extend. 

When you buy a property, the lease length should be discussed and at that point, you’ll know whether you’re likely to have to extend it in your time there.  If it’s already close to 100 years left, you’ll need to extend it; if someone has already done that and it’s a lease of, say, 150 years, you’re probably safe.  (That 150 years will already have been incorporated into the price you paid for the flat.)

How much will it cost to extend the lease?

It’s impossible to give a definitive answer to this but here are the factors involved:

·       Value of the flat

·       Ground rent

·       The review pattern of the ground rent

·       Length of the existing lease

And then as well as paying your own legal and surveying fees, you are also liable for those of the freeholder.  You’re forcing him to extend the lease and so you pay the fees.  It may seem tough, but the ‘value’ of the longer lease will be included in your sale price.  It’s worth it, I promise.

So poor old Katie and James didn’t consider the lease when selling but all was not lost.  Their lease extension process took around six months and although they were cutting it fine, they did indeed take their baby boy back from the hospital to their new house and they had still made a profit. 

It was stress that could have been avoided though.  I would strongly recommend that if you’re considering selling a flat, check your paperwork first and if you’re in any doubt, give me a call.