Why Should I Bother Extending The Lease On My Flat?
By: Leasehold Advice | Posted: 07th December 2011
Thousands of leaseholders of flats extend their leases each year but why do they bother? Maybe you have been contacted by your freeholder with an offer price to extend your lease. Maybe you have heard that your neighbours are doing it. Now you are wondering why you should extend the lease of your flat as well. Maybe you can just ignore it.
The first thing to understand is that, a leasehold property is a ‘wasting asset’. Most buyers of flats believe the price will go up as the market goes up. But this is not always necessarily true, especially if you have a shorter lease.
It is important to understand in the first instance that, as the owner of a flat, you almost certainly have a lease with someone called the ‘freeholder’. Some people have a share of their freehold so they are both leasehold and freeholder, but a short lease length must still be addressed.
The freeholder is the person or organisation who owns the land beneath and around your flat. Your lease is a time-limited agreement (between 21 years and 999 years but usually around 125 years from when the flat was built) with that individual or body. The lease has a fixed time and ultimately, when the time runs out, you must give the flat back to the freeholder. Because the flat reverts to the freeholder, they are sometimes also called the reversioner by solicitors and surveyors specialising inleasehold enfranchisement.
So there is no doubt, that one day the lease will have to be extended unless the long leaseholder (the flat owner) is happy to give the flat back to the freeholder at the end of the term. The freeholder can then sell a new lease to someone else but the ‘flat owner’ is left with nothing and may need to buy another property.
This may sound dramatic and for many flat owners they never doubted that they wholly owned their flat. So it may come as a shock that one day the flat must be given to someone else unless a lease extension is bought and negotiated.
So that explains why the lease must be extended one day. Many flat owners consider putting off the major expense of extending the lease because they are not concerned that in maybe 70 years the freeholder takes back the flat. But they should be concerned.
You as an owner of a long leasehold property may not be bothered that one day the property reverts to the freeholder, but two sets of people are: mortgage lenders and buyers. And the two are tied in together. Generally, mortgage lenders and property finance companies require the lease to have at least 70 years remaining. Rules vary between the financial institutions with some demanding as much as 80 years. However, with the current difficult property market, lenders are restricting borrowing by asking for ever longer leases. If your lease is shorter than their requirement, they will not consider lending on that property.
Buyers needing to use finance such as a mortgage may love your flat, but, if the lease is too short, banks won’t lend on it and they cannot buy it. So purchasers then need to look at your next door neighbour, who may have extended their lease. Buyers may love your property so much that they will be willing to fund the lease extension, but that hassle and cost will be priced into their offer.
Cash buyers need not worry about the restrictions by the banks so they can buy short-lease properties more easily. However, there are not many cash buyers compared with buyers using mortgages. And cash buyers know that your market is much smaller because the majority of buyers need mortgages, thus mortgage-funded buyers cannot buy your flat even if they wanted to. As a result, cash buyers will push down the price and negotiate very hard.
Flat owners may be heard to say on occasion, “I plan to keep the flat forever.” In this instance, whoever inherits the property will need to extend the lease. This is an unfortunate legacy to leave to loved ones who may want to get a mortgage against the property or to sell it.
More mature leaseholders may wish to use equity release to unlock funds in their property to fund their retirement. Again, much like bank mortgages, equity release is extremely difficult if not impossible with a short lease property.
Many flat owners are concerned that they do not have the funds to pay for a lease extension. Sometimes it is £10,000 including fees, other times it is dozens of thousands of pounds. Experienced leasehold enfranchisement valuers will give an accurate estimate of the true costs. Banks will usually add the cost of the lease extension to the mortgage. They are happy to do this because the process increases the value of the capital – your flat – by more than the cost of the transaction. So it increases their security. However, your mortgage payments will almost certainly increase.
If you have a lease with less than 100 years remaining then you should consider extending the lease. It gets rapidly more expensive as each year passes – with a big jump at 80 years. And it is a matter of ‘when’ and not ‘if’ the lease extension is undertaken.
Andrew Szebeni helps run the administration at the Association of Leasehold Enfranchisement Practitioners. ALEP has 108 vetted members including specialist solicitors/surveyors.Find out more at www.alep.org.uk/findaleaseholdsolicitorsurveyor
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Tags: neighbours, no doubt, shock, first instance, solicitors, new lease, leases, surveyors, freeholder