Watch out for this property pitfall
Last Update: Tue, 14/09/2010 - 11:55
Watch out for this property pitfall | Moneywise
While you may feel there are more pressing things to worry about, extending the lease on your home is something you need to consider, as leaving it too long can have dire financial consequences, discovers Emma Lunn.
If you own or are thinking of buying a flat built in the 1970s or 80s, it's wise to check the length of the remaining lease, as an unexpectedly short lease could result in considerable financial pain later on.
I've been discovering this first hand, being in the early stages of extending the lease on a flat I own in south London, which has 77 years remaining.
Leasehold extension is the process of extending a lease on a property by paying the landlord or freeholder a sum of money, which is sometimes referred to as 'compensation'.
Unfortunately, I've let the lease drop below the magic number of 80 years. David Smith, senior partner at property consultant Carter Jonas, explains: "Once the lease length drops below 80 years, the cost of extending the lease can jump significantly as every year passes."
This is because the landlord is also entitled to a 50% share of the 'marriage value' on leases of less than 80 years. This is essentially the increase in the value of the flat arising from the lease being extended.
Extending a lease
The first step in extending a lease is to check if you're eligible to do so. The 1993 Leasehold Reform Act states that flat owners have the right to extend their lease once they have owned the property for two years.
Under the Act, a lease extension will add 90 years to the current balance of your lease and your ground rent will reduce to a peppercorn rent or no rent at all.
So when I extend my lease, the new lease will have 167 years (77 plus 90) to run and I won't have to pay the annual £150 ground rent anymore.
But there are certain situations where a leaseholder won't be able to extend the lease – for example, where the majority of freeholders have applied to buy the leasehold, the lease has already ended, or the freeholder is a charitable housing trust or The National Trust.
So how much will I have to pay? That's the million-dollar question. Extending a lease is a question of negotiating with the landlord or freeholder and then getting a new lease drawn up.
Leaseholders can get a rough idea of the cost of a lease extension by entering a few details on to the online calculator at The Leasehold Advisory Service website (lease-advice.org). The website says my lease extension should cost between £6,000 and £8,000.
Leaseholders can make an offer to their freeholder based on rough calculations such as this, but it's better to instruct a specialist surveyor to carry out a lease-extension valuation.
They will be able to provide you with best and worst-case scenarios, advise you on the amount of money you should offer the freeholder, and help you to negotiate an agreement.
"A surveyor will look at a number of things during the valuation process," says David Dalby, a director of built environment and property at the Royal Institute of Chartered Surveyors.
"These include the length of the lease; the location of the property; ground rent; demand for the property; and terms in the lease.
"The surveyor also looks at the value of the flat with the lease as it is and the value of the flat when the lease is extended, as well as evidence that can help your case such as similar cases and negotiations."
The Leasehold Advisory Service website has a list of specialist surveyors who do leasehold extension valuations. The surveyor I instructed visited my flat, wrote a report and advised a figure of £5,625 as a starting point for negotiations.
From this point, I have two options: either approach the landlord informally and make an offer, or instruct a solicitor to serve a 'Tenant's Notice' on the landlord, which will include my opening offer.
Informal offers can work in some circumstances, but there are no rules to say that a landlord has to respond.
However, if a Tenant's Notice is served, the landlord is obliged to respond within two months – otherwise they can be forced to grant the lease extension at the price stated in the notice. Either way, I'll need a solicitor to complete the paperwork.
Paul Marsh, conveyancing expert at the Law Society, says there are two main reasons why you need to involve a solicitor. "First of all, extending your lease is a complex process under the 1993 Act, which is heavily weighted against the tenant.
You need to make sure you get a fair deal. And secondly, it's a complicated piece of legislation that affects the value of your property. You need to make sure you get it absolutely right, otherwise it can be disastrous," he says.
"Under the Act, a lease extension should mean no more ground rent is payable, but without a solicitor involved the new lease could include ground rent. It's also a good chance to iron out any problems with the lease or service charges," he adds.
I'm using a local solicitor to serve a Tenant's Notice on my landlord, offering the price quoted in the surveyor's valuation (£5,625).
Once the notice is served, my landlord has two months to respond, either by accepting the offer or making a counter-offer. I can then make another offer somewhere between the two figures until we agree.
In most cases, there are a lot of negotiations between each party's surveyors before a price is agreed, and they go on for months. Having a good surveyor on your side is vital.
So how much has the leasehold extension cost me so far? The surveyor charged £400 and the solicitor £975 plus VAT. Leaseholders also have to pay the landlord's legal and valuation costs, so I can expect to pay this much again.
If a price can't be agreed, I can take my case to the Leasehold Valuation Tribunal (LVT) to make a ruling – but this means another bill from both my surveyor and solicitor for the extra work involved.
According to my solicitor, just threatening to take a landlord to a tribunal is usually enough to make them see sense.
Experts say the main way to keep the cost to a minimum is do it sooner rather than later – and before it drops under 80 years.
"Don't leave it until you want to sell your flat, otherwise you'll be completely stuffed. The buyer will make you pay for it and it will mean added stress in what's an already stressful process," warns Marsh.
What is a lease?
Leasehold ownership basically means a long tenancy and the right to own, occupy and use a property for a long period. The lease is the contract between the flat owner and the landlord or freeholder who owns the land and building.
Leaseholders normally pay a ground rent to the landlord and service charges for the upkeep of the communal parts of the building.
The term of a lease is set when the property is built, usually between 99 and 999 years, and it decreases each year. In theory, at the end of the term, the flat is returned to the owner of the building, but in practice most leases are extended well before they expire.
Can the length of the lease affect my mortgage?
If a lease drops below 70 years, the flat will become more difficult to mortgage. If you're in this situation, therefore, it's a good idea to start the lease extension process before you want to sell or remortgage your property.
David Hollingworth, mortgage specialist of broker London & Country, says lenders want to know how long the lease runs for and have criteria on the minimum length they can accept.
"This requirement varies from one lender to another, so if there's a question mark over the remaining lease period, it makes sense to bring this up at the earliest opportunity."
Some lenders are stricter than others. Halifax, the UK's second-largest mortgage lender, requires a lease of at least 70 years to grant a mortgage.
However, Nationwide and Abbey both require a minimum of 55 years at application, with 30 years remaining at the end of the mortgage term.