In its latest report, the London School of Economics (LSE) highlights problems for leaseholders who are being asked to pay excessive amounts when they extend the lease on their properties.
According to the LSE 'The researchers estimated how a property's sale price varies with the remaining term on the lease by analysing data from 8000 sales of leasehold properties that took place between 1987 and 1992 in Belgravia, Chelsea and Mayfair.'
(The London areas used in the research have some of the highest concentration of short leases in the UK and have historical property data available.)
It suggests that when extending a lease, current practises may underestimate the value of leasehold properties.
Charles Oliver, an expert on leasehold residential property at Caxtons says "Typically leases begin with 99 or 125-year terms. However, the value of a lease will go down as the time on it diminishes and it could prove difficult to sell a flat, particularly when the lease has fewer than 60 years left to run because most potential purchasers will have difficulty getting a mortgage on the property."
As long as the owner and the flat qualify, leaseholders are entitled to extend the lease by an extra 90 years at no rent, but must have owned the flat for 2 years (although that does not apply when collectively buying the freehold*).
The fee to extend a lease will depend on how much ground rent is due, and how long the lease has left to run; the shorter the lease, the more it will cost. The price takes account of the loss of the ground rent income to the landlord and the fact that he will have to wait a further 90 years before receiving full market rent. If the lease has less than 80 years to run, then the price will increase as the calculation also takes account of the value of a flat now and after the lease has been extended because the landlord is entitled to half of the increase between the value of 'his' and 'your' interests added together, before and after purchase, called 'marriage value'. The leaseholder will also have to pay all legal and surveyors costs.
In order to extend a lease there is a procedure with strict deadlines that must be followed. The leaseholder is entitled to ask for information about the landlord, who in turn is entitled to visit the property to value it. The landlord may ask for 10% deposit (of the price offered by the
An alternative option would be to *purchase the residential property freehold from the landlord. As long as the building qualifies, the landlord is not protected, and the required number of qualifying tenants wish to participate, they can join together and require the freeholder to sell to a nominee purchaser or Right to Buy company that will be set up to buy the freehold. Having followed a strict procedure, tenants will then own a share in the company and, with the other tenants, jointly become their own landlord. This procedure is known as enfranchisement.
The fee to 'buy out' is almost the same as for extending the lease, except the landlord will lose the rental income completely, and it will take into account the value of all of the leases.
With both freehold purchase and lease extension, if a price cannot be agreed, then the matter must be referred to the independent First-tier Tribunal within a six-month deadline to decide the terms.
If the landlord plans to sell the freehold to someone else, he must give the tenants first refusal, as long as there are at least 2 flats, at least 50% of the building is residential, and a majority of the tenants qualify. If he plans to sell by auction, the leaseholders must be given four months' notice so they can reserve their right to match the winning bid.
There are many long-term advantages to extending a lease or jointly buying the freehold – not least the value of a flat upon sale - but it can be a complicated procedure so advice from a professional who knows about enfranchisement is essential.
Charles is an associate director of Kent based property firm Caxtons Chartered Surveyors and specialises in valuations, landlord and tenant negotiations, expert witness reports, compulsory purchase and leasehold enfranchisement valuations on residential property. Caxtons Professional Services team has the expertise to help you with all your commercial and residential property needs.