80 Years Left: Should you extend your lease in 2019?
Posted on January 21st 2019
With leasehold reform looming – should you extend your lease in 2019?
Leasehold properties have a certain length, at the end of which the property will revert to the freeholder. This can be avoided by extending your lease. Properties with shorter leases are less valuable than ones with long leases, especially if the lease is below 80 years. These properties are a lot more difficult to secure a mortgage on as mortgage companies rightly worry that its value will decline and so won’t be good security. They are also tougher to sell; no one wants to invest in a property which is potentially valueless.
Extending your lease:
The solution, therefore, is to extend the lease. The 1993 Leasehold Reform Act gives flat owners who have owned their property for at least two years the right to extend their lease by 90 years and have the ground rent reduced to zero. Homeowners will only get an additional 50 years, and so it may be more cost-effective to think about purchasing the freehold instead.
18% of English housing stock are leasehold properties. This equates to 4.3 million homes, around half of which are on leases of under 80 years. These particular leases are especially costly to extend. For example, for a £170,000 2 bedroom flat in Chester with a lease of 70 years left, and a moderate ground rent, you could expect to pay between £12,000 and £14,000 for an extension of 90 years. Where the remaining lease term is 100 years or more, with a similar ground rent, you would be paying half of this amount; between £6,000 and £8,000.
Looming legal reform:
In order to combat these cost discrepancies, in December 2017, then Communities and Local Government Secretary Sajid Javid asked the Law Commission to find ways to make buying out a lease “much easier, faster and cheaper.” In response, the Law Commission gave two options for legal reform in this area.
The first reform is a formula by which the cost of extending the lease would be calculated by ten times the ground rent, or 10% of the value of the property. With ground rents averaging around £370 a year, this suggests a cost of £3,700. This figure is a lot cheaper than the amounts calculated above, and the simple formula has the benefits of being easily understood and reducing legal costs.
The second option is to remove the “marriage value” from lease extension calculations. This extra cost is the increase in the value of the property following the completion of a lease extension. The additional market value of the longer lease is only added to properties with leases less than 80 years, so the removal of this would standardise the cost of lease extensions.
Should you extend your lease in 2019?
Despite the Law Commission’s quick response to Sajid Javid’s request, intervention and changes by the Government are not likely to come until the summer of this year. However, the longer you wait to extend your lease the more expensive it becomes. So, what should you do in the meantime?
If you have a need to extend your lease i.e. it may be approaching the 80 year mark or you need to sell your property, the advice is to take action now. If not, it may be more beneficial to wait for the reforms.
How can we help?
We help leaseholders every year extend their lease, and offer expert advice in this area. Learn more about our leasehold services by clicking here. Alternatively, you can call us today on 01244 312306, or fill in our contact form.
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