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Should I Be Extending My Lease?

Thursday, November 30, 2017

Do you own a leasehold flat? Then spare a moment to consider whether you should be extending the lease.

If you purchased the flat with 99 years or less unexpired then it will certainly be in your best interests to extend the lease before the unexpired term falls below 80 years. If you are thinking of selling your flat within the next few years then a longer lease will certainly make the property more saleable and also increase the market value of the property. Many solicitors and estate agents dealing with a lease of 85 years unexpired or below will now recommend that the lease be extended.

1993 Act to extend your lease

You will need to have owned the flat for at least two years in order to qualify under the 1993 Act to extend your lease. Alternatively, if you are purchasing a flat, and wish to extend the lease immediately then it is possible for the vendor’s solicitor to serve notice under the 1993 Act and this can then be transferred into your name on completion of the purchase so that you do not have to wait for the usual two year qualifying period.

Provided that you qualify under the terms of the Leasehold Reform, Housing and Urban Development Act 1993 then you are legally entitled to purchase a 90 year extension to the existing lease term at a new peppercorn (zero) ground rent for the whole of the new term. Thus, if you currently have a lease term of 70 years unexpired with an annual ground rent or £50, the extended lease would be for 160 years with a peppercorn (zero) ground rent.

The premium to purchase an extension to the lease is assessed by calculating the present value to the freeholder of the future ground rent payable under the existing lease plus the present value of what the flat would be worth at the end of the existing lease when the flat would otherwise have been handed back to the freeholder. This is known as the reversionary value.

If the present lease has less than 80 years unexpired then the freeholder is also entitled to a 50% share of the marriage value. In simple terms, the marriage value is the difference between the value of the flat with an extended lease, and the value of the flat with the existing lease, on the assumption that the lessee has no rights under the 1993 Act.

The value of the premium

The value of the premium obviously varies depending on the various figures and yields applied. Under the terms of the 1993 Act, the lessee will also be responsible for the freeholder’s reasonable legal and valuation costs in dealing with the matter.

It is also possible for a group of leasees in a block to jointly purchase the freehold interest in the whole property. This is known as Collective Enfranchisement. At least 50% of the lessees have to participate in the purchase of the freehold unless the building has only two flats and in that case, both lessees must participate in the purchase. The cost can be higher than the individual lease extension particularly as the participating lessees also have to purchase that part of the freehold interest relating to those lessees who do not wish to participate in the purchase.

It is therefore very important that the amount of the premium is assessed accurately and professionally.

Article provided by John Card - MAP Chartered Surveyors