Now is the time to add value to your home by extending the lease
Ten things you ought to know when considering whether to renegotiate the length of the lease on your property
1. If you want to extend the term of your lease, do it now, says Lucian Cook, of the estate agent Savills. He says that the cost of enfranchisement – that is, leasehold extension – could fall to its lowest point this year.
2. When determining the cost of extending a lease, valuers take into account the ground rent income, usually a nominal amount, and the reduction in the investment value of the freeholder’s interest. When a lease is shorter than 80 years, the cost also includes 50 per cent of the “marriage value”, the amount by which the value of the property will increase once the lease has been extended.
3. Since both the investment value and the marriage value of the property are linked to its price, the state of the housing market has a significant impact on the cost of enfranchisement. In a rising market, it pays to extend a short lease early: first, because the cost of extension is linked to the price of the property, and second, because the shorter the lease, the more expensive it is to extend.
4. In a falling market, there is less incentive to enfranchise because the value of the asset is diminishing. However, once the market turns, the cost of enfranchisement will rise more steeply than house prices. “Although we forecast that prices in prime Central London are due to return to their peak in 2014, the costs of enfranchisement will return to their 2007 levels two years earlier,” Cook says.
5. The leasehold system, which arises from laws dating to the Middle Ages, means that when you buy a flat in England and Wales, you are not purchasing the property outright, only the right to live in that property for a specified period. Most leases last for between 99 and 125 years.
6. In most cases, leaseholders have a right to purchase an extension to their lease, although there are exceptions. If the majority of the leaseholders in a building have already applied to purchase the freehold, for example, a lease extension will not be possible, neither will it be possible if the term of the original lease was less than 21 years. Such properties are rare.
7. If a property has a lease with less than 40 years, it is difficult to get a mortgage, as lenders are increasingly reluctant to offer loans to properties that do not meet standard criteria.
8. Some investment buyers specialise in purchasing short-lease properties, particularly in prime Central London. Short-lease properties are sold at considerable discounts: as a general rule, a property with a 25-year lease could sell for as little as 50 per cent of the freehold value, while a property with 50 years on the lease might cost 70-75 per cent of freehold value.
9. There are many reasons to purchase a property with a short lease – some purchasers like the “buy now, pay later” concept – but one of the main reasons is speculation. Investment buyers will try to purchase a property with a short lease in the hope of enfranchising at a reasonable cost and selling for a profit. But Alex Greenslade, of Leasehold Solutions, an adviser, says that buyers need to beware of carelessly extended leases. Even a small increase in ground rent can have a big impact on the price you will pay a freeholder if you want to buy the freehold lease later. If the lease has been extended to only 99 years, “you might find you that have only a 14-year sticking plaster until the problem of a short lease presents itself again”.
10. Cook says that buyers should be wary as the chance of making a profit is reduced when property prices are flat or rising slowly. And David Adams, the head of residential at the estate agent Chesterton Humberts, comments that most buyers are very suspicious about being encumbered with a short lease. He says: “We have a team that is engaged full-time on helping owners to extend leases just so that they can sell their property. In this market, buyers are concerned about being able to get out of their property investment in a hurry should they need to, and a short lease is a barrier to that.”
Copyright Leasehold Solutions and Alex Greenslade. Reproduction by permission only