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When is the right time to extend the lease on a flat?
When purchasing a leasehold flat, it is important to appreciate that the lease is a diminishing asset (i.e. it loses value as time ticks by).
If you require further advice, please contact our Leasehold Enfranchisement specialist Samantha Marsh.
If you are looking to buy a flat with a lease it is important to ask your solicitor to check exactly how long is left on the Lease at the outset. You do not want to pay for searches and surveys only to find out that the lease is short. Similarly, if you bought a flat a few years ago it is surprising how quickly time ticks away, and so it is worth getting your conveyancing papers out to check how long is left to run on the lease.
When a lease drops below 80 years, Flat Owners can sometimes experience difficulties in selling their flat as buyers may insist on a lease extension being obtained so that they buy the property with a new 99 year lease. Alternatively, they may just make a much lower offer to reflect the short lease. There is also a risk that they will be put off altogether and buy another flat, or even be prevented from proceeding by their mortgage lender.
Once a lease has dropped below 80 years remaining (even one day below) the premium payable to the freeholder rises sharply, literally overnight. This is because an additional element becomes payable once the lease has less than 80 years left to run, and this element, known as ‘Marriage Value’ is very expensive. The premium will continue to rise sharply the shorter the lease becomes and does not rise in proportion to the declining length of the lease.
When a lease drops down below 70 years the problem can become more severe. In extreme cases the flat may become unmortgageable, and hence, unsalable to anyone other than a cash buyer. The UK Finance Mortgage Lender’s Handbook (previously called the Council of Mortgage Lenders Handbook) contains the general acceptability criteria for the residential lenders market and the average requirement is that the length of the lease must be ‘the mortgage term plus 30 years’. Many first time buyers are now borrowing for 35 years in order to be able to afford the repayments. There are a handful of lenders who refuse to lend on anything below 70 years, regardless of the mortgage term. In these circumstances only a cash buyer could proceed and they are a scarcity amongst flat buyers.
Property prices also have an impact on the premium payable, as when calculating the premium regard must be had to what the flat will be worth once the lease has been extended (this is known as the ‘long lease value’. In times of a strong housing market those with short leases are advised to act sooner rather than later as the combination of a short lease and a buoyant housing market can add significant expense to the premium.
It is therefore vital for leaseholders to take steps to extend the lease before it drops below the crucial 80 year mark as the process is likely to be significantly cheaper than if you wait until this time has passed. If a leaseholder has missed this deadline then they would be best advised to act sooner rather than later in extending the lease, as the process becomes more and more expensive as time ticks by.
Leases that were granted in the 1960’s, 1970’s, 1980’s and even the 1990’s are now prime candidates to be extended and so it would be prudent for all buyers, and indeed current Flat Owners, to ensure they are aware of the length of the lease and take appropriate steps to extend it.