Leasehold Extension - Valuation
An outline of the valuation principles to determine the price for extending a lease of a flat under the Leasehold Reform Housing and Urban Development Act 1993.
By Nicholas Kissen, Senior Legal Adviser
This article originally appeared in The Estate Agent magazine in December 2011
Whether they are in purpose-built blocks, converted houses or located above shops and offices, flats will invariably be granted and sold as leasehold.
Ownership on a leasehold basis gives a right to an occupation and the use of a flat for a lengthy period – that is, the term of the lease. Many flats on new developments are for 999 years. And those bought from the council under the Right to Buy scheme would be for 125 years. Many others are for 99 years. During this period, the flat can be bought and sold. But the term does not change and, as years go by, the lease will reduce in length and in value, becoming less attractive to mortgage lenders.
Banks and building societies differ in their lending criteria. Some draw the line at 75 years remaining on the lease; others may be happy with anything over 70 years. Below 60 years, it may be difficult to get a mortgage at all.
However there are ways to overcome the “short lease” problem. First of all, the landlord can be approached to see if they will negotiate an extension. But sellers should be aware that this may not result in a good deal. Parting with a large amount of money for what may be an extra 20 years or so, and with an increased rent, may leave the seller feeling they are at the losing end of the bargain.
Help is at hand, however, in the form of rights granted under the Leasehold Reform Housing and Urban Development Act 1993. Subject to owning the flat for two years, the leaseholder can force the landlord to extend the lease and on potentially attractive terms. The flat owner is entitled to an extra ninety years on top of what is remaining and with the whole of the term being at a peppercorn (nil) rent. So, if 75 years are left to go, a new lease of 165 years (90 plus 75) can be granted in substitution for the existing lease, with no rent to pay throughout the whole term. And there should be no difficulty marketing a lease of so many years.
Going down the 1993 Act route involves the service of formal notice on the landlord. It should include certain information, crucially the price proposed for the lease extension. This should be calculated by a professional valuer. It is based on a formula designed to compensate the landlord for the loss of ground rent and the fact that the right to get the flat back at the end of the term is postponed by ninety years. In addition the landlord is entitled to half the so-called “marriage value”; basically the increase in value thanks to the extension.
No marriage value is payable at all where over 80 years is left on the lease at the time the formal notice is served. Sometimes this can make a difference of several thousand pounds. So, if you are the owner of a flat, particularly if you are thinking of selling, with a term remaining of, say 83 years you should consider extending the lease. If your lease is a shared ownership lease, please note that unless you have staircased to 100% you can’t formally extend the lease. Some housing associations allow informal lease extensions for shared ownership owners, but these are at their discretion and might be more costly.
Transferring the benefit of the notice
But won’t the buyer lose interest whilst the seller completes the extension? If this is a possibility the formal notice can be served on the landlord and a deed executed transferring the benefit of the notice to the buyer. In this way the extension process can be progressed post-completion, notwithstanding the new owner has not had the lease in his name for two years. This is a particularly attractive solution where the lease has between 80 and 82 years left. To proceed otherwise would mean the new owner having to wait two years before they can compel the landlord to grant an extension and, in the meantime, 50% marriage value will have become payable on the price as the term will have dipped below 80 years.
So keep an eye on the length of your lease and remember: –
- After two years a flat owner can buy an extra ninety years to their lease.
- No rent will be payable during the term of the new lease.
- 80 years is the crucial cut-off point. Below that and the lease becomes more costly to extend.
- When selling the flat, the owner can serve the formal notice on the landlord and transfer the benefit to the buyer.