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Do I need a lease extension?
When you purchase a flat you do not own the property outright. What you have bought is the right to live in the property for a fixed term of years, but your landlord will continue to own the freehold of the building.
Most leaseholders do not worry about the length of the lease until they come to try to sell their flat. As your lease term decreases so does the value in your flat. Once it gets to 70 years or below it becomes harder to sell as mortgage companies start imposing stricter lending criteria and may not even lend on it if they consider the lease is too short. Most mortgage companies want at least 40 years remaining after the mortgage is paid off. As the majority of mortgages have terms of 25 years, the lower the lease the harder it will be to lend on and you may be restricted to cash buyers. This can also become an issue if you wish to re-mortgage the property.
It is often cheaper to agree a lease extension with your landlord then it is to reduce the asking price. Most landlords will agree a lease extension but take the opportunity to increase the term back to 99 or 125 years with a more modern ground rent.
If you cannot agree a lease extension with your landlord then the good news is that there is a statutory right to purchase a lease extension from your landlord if you meet the criteria. Broadly speaking, if you have owned a long lease for at least 2 years then you can extend it by a further 90 years on top of what is currently left on the lease with no ground rent payable in the future. A long lease is one that was originally granted for more than 21 years.
When should I think about extending?
The earlier you think about a lease extension the better as unfortunately the longer you wait the more expensive it becomes. If you extend before putting the property on the market you will have more bargaining power with the landlord as you will not be worried about a sale falling through. Also, unless you are able to find a buyer that is happy to take on a statutory lease extension, you may not have enough time to start the statutory process and keep a potential buyer as the statutory process can take a while to complete.
So how much will it cost?
You will need expert help as working out the premium for a lease extension is a complex calculation. The market value of the flat, the amount of ground rent and rent increases are all factors that have to be taken into account when calculating the cost of extending a lease. You can get an indication of the cost from the online calculator at lease-advice.org but if you wish to proceed with a statutory lease extension then you will need to instruct a surveyor.
You are also responsible for the landlord’s legal fees and surveyor fees as well as your own so the costs can add up. However, you will be increasing the value of your property and once you extend you will not have to touch the lease again before you sell.
If your lease still has 80 years or more to run then there is a big advantage as you do not have to pay the landlord a “marriage value”. This is the extra value that could be achieved if you “married” the leasehold title with the freehold title. If you think your lease has 80 years to run do not delay making an application as the “marriage value” will notably increase the premium payable to the landlord.