Let's talk leases
Buyers and sellers are often unclear about how leases work and what impact they can have on property value. John Williams takes some advice from a local solicitor and looks into some of the most commonly asked questions.
What is a Lease?
In essence, a lease is a contract granting the leaseholder ownership of a property for a fixed period of time. Jonathan Frankel, a solicitor specialising in this area of law, explains: “In law a leaseholder is seen as a tenant. The tenant’s contract is with the freeholder or landlord. The freeholder owns the land in perpetuity, so when a tenant’s lease expires, ownership of the property reverts to the freeholder.”
Why does lease length affect property value?
A lease is a diminishing asset. It costs money to extend a lease term – the shorter the remaining term, the greater the impact on the premium (price). A lease with a remaining term of 1 month is worth very little as ownership of the property is about to revert to the freeholder, but a property with a remaining lease term of 800 years is worth virtually the same as a freehold (who knows what sort of homes we’ll be living in by the 29th century!).
Jonathan: “When assessing the value of a leasehold property, a buyer, agent or surveyor should be considering the length of the lease and the likely cost of extending it as one of the main factors.”
How can I extend my lease?
There are two options. The first is to use the Leasehold Reform Housing & Urban Development Act 1993 – this piece gives a leaseholder the right to extend a lease once they have owned it for 2 years, by 90 years for a flat or 50 years for a house. When a lease is extended this way the ground rent is reduced to zero. The second option is to negotiate with the freeholder, which some find simpler.
Jonathan: “The advantage of using the legal route is that as long as you qualify under the Act you know that you will be granted a lease extension if you see the process through. Negotiating with your landlord might be quicker but be careful – it is not unheard of for a freeholder to agree a premium but then go back on their word before the process is complete, which means you may still have to make an application to the Property Tribunal for the premium to be determined anyway.”
When is a lease considered short?
People have differing opinions on this. Mortgage lenders will take lease length into account and if they consider the term to be too short they will decline to lend – buyers should check their lender’s rules on lease length before offering on a property. Some people won’t see a relatively short lease as a big deal, but it is sensible to assess the cost of extending a lease.
Jonathan: “The important number to remember is 80. As a lease term diminishes, all other things being equal, the cost of extending it increases. But when the remaining lease term drops below 80 years the method for calculating the premium changes and the price can increase dramatically as a result. Be aware that the leaseholder is responsible for the freeholder’s reasonable professional costs as well as their own.”
Can I buy the freehold to my property?
It is possible to purchase the freehold (or a share of it) although how simple this is will depend on whether you own a flat or a house. If you own a flat, then you’re likely to need co-operation from your fellow leaseholders, which is known as enfranchisement. Jonathan says that you should carefully consider what the best option is for you.
What if I have an Absentee Freeholder?
A leaseholder’s right to extend the lease is unaffected if the freeholder is absent, but first you will need to prove that they are absent, which can be complicated.
Jonathan: “You must demonstrate to the satisfaction of the local County Court that all reasonable efforts have been made to track them down. If you are successful you will be issued with a vesting order and then you can proceed with the lease extension procedure.”
What if I want to sell and have a short lease?
There are various options available, such as:
- Extending the lease before sale
- Extending the lease with your sale and paying for it on completion
- Beginning the lease extension process so the buyer can conclude after completion
- Selling with the short lease
- Purchase the freehold and extend the lease for nothing
Jonathan believes you should assess your options as early as possible and adds, "the option which is financially most beneficial for you might be the most complicated.”
How are lease premiums calculated?
There isn’t an exact science but the premium is the total of:
- The loss in value to the landlord if they have to wait an additional 90 years before ownership reverts to them
- The loss of future ground rent (because it will be reduced to zero)
- Compensation for any other loss the landlord may incur, although this is rare
When the remaining lease term is lower than 80 years, another factor called the marriage value is considered. This is the potential increase in the value of the property once the lease is extended, and 50% of this increased value is added to the premium.
Six steps to extending your lease
- Leaseholder obtains an estimate of the premium from a surveyor and listens to their advice on how much to offer
- Leaseholder’s solicitor serves section 42 notice, which asserts the right to extend the lease and includes the formal offer
- Landlord must accept or serve a counter-notice by the date specified, which is at least two months from the date of service of the tenant’s notice
- Parties may now settle or apply to the tribunal. This must be done no sooner than two months from, but within six months of, the date of service of the counter-notice
- The tribunal determination becomes final after 28 days. Appeals must be made within this period.
- After the tribunal decision is final landlord must provide draft lease within 14 days. There is a period of two months after decision becomes final for parties to enter into the new lease. The whole process takes between 3 and 12 months.
John Williams is Head of Residential Sales for Outlook. If you own a leasehold property you would like valued, contact John on: T: 020 8221 4444 E: [email protected]
Jonathan Frankel is Partner at Cavendish Legal Group based in their office on Hoe Street, Walthamstow. He specialises in lease extensions, enfranchisement, right to manage and disputes between leaseholder, freeholder and management companies. T: 020 8509 6816 E: [email protected]
This article is not designed to be a full assessment of the complex legislation governing leaseholder’s rights. You should take legal advice from a qualified solicitor if you are considering whether to extend your lease.