LEASE EXTENSION OR BUYING A FREEHOLD - ADVICE FROM LETTINGFOCUS.COM
Letting Focus property expert Lawrenson explains how to extend the lease on your flat and what it costs - plus why it often makes more sense than buying the freehold.
Property expert David Lawrenson of www.LettingFocus.com says, "Extending a lease can often be a better idea than buying a freehold."
BUYING A FREEHOLD CAN BE HARD WORK
For many people buying the freehold is one of the best ways to increase the value of their flat. It can be particularly attractive to "enfranchise" when service charges are high and increasing and the block is being poorly managed by the current freeholder.
And when you buy a share of the freehold you are free to extend the lease with usually only a small additional legal cost.
If your lease is under 75 years it can prove difficult to sell the property because mortgage lenders are not keen to lend on flats with short leases as they do not provide them with enough security.
However, before you can buy a freehold you have got to get the agreement of at least half your fellow leaseholders and this can be hard to do where there are lots of people to convince of the benefits or where the owners are hard to get hold of.
Also, once you have got the freehold someone has to run the freehold company and serve as directors. And, of course, there are legal responsibilities that come with running any company.
The hassles involved in this can mean that your co-freeholders, who were such nice people as fellow leaseholders, can suddenly turn into dragons.
LEASE EXTENSIONS OFTEN EASIER
For these reasons, many people go for a lease extension instead.
Alex Greenslade of Leasehold Solutions says “Extending a lease can often be the way to go if the freeholder and managing agents are doing a decent job. In order to extend a lease you have to have owned a lease for at least two years and have “long leases” which means the length of the lease when originally granted must have been at least 21 years."
It is best to start thinking about extending the lease as soon as the lease is less than 82 years because once it is at or under 80 years you’ll automatically have to pay the freeholders half of what’s called the “Marriage Value” - which is the theoretical profit you make when you extend the lease.
To extend your lease, the first step is to issue a notice to the freeholder and then come to an agreement on a valuation. You’ll need to draft in the help of a valuer and a solicitor.
You can extend your lease by another 90 years. So if you have 81 years left, you’ll end up with a lease of 171 years.
Unfortunately, you have to pay the freeholder's professional fees whether you complete or not, so although you can do it on your own, it’s better to work with other leaseholders to share the cost.
The cost of extending leases got a bit more expensive in the last few years when the courts set the principle that leasehold valuations should be linked to the rate of return on government bonds.
This had the effect of increasing the future value of freeholds which also meant that the value that freeholders could charge for extensions was correspondingly higher.
But it can still make good sense and of course will increase the value of your flat, usually by a lot more than the cost to extend the lease.
CASE STUDY OF A LEASE EXTENSION
Airline Purser James Forbes worked with fellow leaseholders to extend his lease at his flat in Hove.
He says, “In an ideal world where all other leaseholders could be persuaded of the benefits of buying the freehold this would be the better option.
For us, though management was not a problem, and as not all leaseholders wanted to buy the freehold anyway, extending the leases made more sense.
Also, the extra time it would have taken to buy the freehold meant that extending the lease was the smarter thing to do, especially for those who wanted to sell soon and who were worried that a diminishing lease would have made selling their property more difficult.”
WHAT DOES IT COST?
As a rough example, if we take a 2 bed flat in Guildford with a value of about £200,000, 75 years to run on the lease and a ground rent of £100 per annum, it would cost between £9,000 and £15,000 to extend the lease.
However, the cost will depend on prevailing interest rates and property values at the time.
ABOUT DAVID LAWRENSON AND LETTINGFOCUS
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