Lease extension opportunity for flat-owners

There has been a great deal of uncertainty caused in the leasehold property market by the enactment of the Building Safety Act 2022 and a general slowdown in the property market.

As usual in every dark cloud there is usually a silver lining for people who own flats that are in building less than 11 metres/5 storeys high who have leases that are getting near the time when the lease might need to be extended.

A downturn in property values particularly in the current climate could benefit flat-owning tenants wishing to extend their leases, says a specialist at award-winning law firm Blanchards Bailey LLP.

Caroline Walton, Partner and Head of Residential Property, anticipates that the cost of lease extensions could well reduce commensurately with expected decreases in property prices.

She says now is an opportune time for leaseholders to start considering lease extensions as long leases are often pivotal factors in achieving quick and successful flat sales.

Hugely experienced Caroline, who is based at Blanchards Bailey’s head office in Blandford, has two decades of involvement in residential conveyancing law, including all aspects of sales, purchases, transfers of equity and remortgages.

She said: “As recently as 10 years ago many long leases were granted for 99 years but you are now more likely to see 125 years. This is because a 99-year lease very quickly reduces to a level which requires owners extend the existing term and many lenders in the hugely influential Council of Mortgage Lenders have set there own requirements before they will consider lending.

Lease extensions are often not considered until one comes to sell a flat or if they are considered, extensions can be expensive. This can make extensions only affordable at the completion of the sale using part of the proceeds to pay for a lease extension and so completing simultaneously.

Given that people mostly sell in a rising market it follows that a good time to extend a lease might be whilst the market is less buoyant.

Caroline has said: “If you have owned a leasehold property for at least two years and you have between 80 and 90 years remaining on the lease, the coming months may be the most opportune time to extend, if you can afford to do so.  It is likely to cost less than leaving it until your hand is forced when you come to sell your leasehold property.

“By extending in the coming months, not only may you get a better deal when prices are lower but you will be ‘market ready’ with a longer lease at the time you come to sell, whether in a rising market or a declining one, in which case leasehold properties with longer terms will be preferred over those requiring extension.”

Caroline said anyone who has owned a residential leasehold property for two or more years is entitled to obtain a lease extension as a right, but the best way to achieve this is by amicable negotiation with the landlord to the mutual benefit of both parties.

She added: “If your current lease has anything less than 90 years left on it now and you are considering selling in the near future, then your property can be difficult to sell.

“Although a few lenders are willing to lend on leases with 70 or more years left on them, a lease that drops below 80 years remaining triggers what is known as the ‘marriage value’ which significantly increases the premium a landlord can command as the premium includes compensating the landlord for the reduction in value of the freehold value – the shorter the lease the more valuable the freehold becomes”

Marriage value is the increase in the value of a property following the completion of the lease extension, reflecting the additional market value of the longer lease. Legislation requires that this profit be split between tenant and landlord.

Caroline said that leasehold properties that are put to the market requiring a lease extension find that the need to extend can seriously hinder the sale.  This is because they often take a lot longer to agree than the process of selling the flat – this can be a deterrent to buyers.  It is best to get things lined up ahead of finding a buyer who may after all need to buy quickly.  Protracted sales and purchase contribute hugely to the chances of a transaction breaking down.

If you have any questions relating to your leasehold property, please contact a member of the Blanchards Bailey residential property team on 01258 459361.

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