19 February 2018

The pros and cons of extending your lease

When you're buying or selling a leasehold property, the length of the lease is a key consideration. It can make a big difference to your ability to secure a mortgage or to find a buyer for your home.

What is a lease?

When you buy a leasehold property, typically a flat or maisonette, though some homes are available on a leasehold basis too – you're essentially buying the right to occupy that property for the length of the lease.

The lease runs down over time. Eventually when it runs out, full ownership of the property will revert to whoever owns the freehold.

Owning a leasehold property comes with slightly different responsibilities than owning a freehold home. With a leasehold, you may need to pay a ground rent to the freeholder each year, as well as service charges that go towards upkeep and maintenance.

Problems with mortgages and selling the property

As the lease gets shorter, it can become more difficult to secure a mortgage against the property.

All mortgage lenders have different criteria. At Nationwide, for example, borrowers looking to buy a leasehold flat in England and Wales need to have a minimum unexpired lease of 55 years at application, with at least 30 years left when the mortgage term comes to an end.

Because it can be difficult to borrow against a property with a short lease, you may also struggle to sell the property if you hope to move up the ladder.

Potential buyers are likely to be put off making an offer for a home they aren't confident of raising finance against. As a result, you may be limited to selling to cash buyers or even having to put it up for auction.

What will it cost to extend my lease?

With these problems in mind, it can be a good idea to look at extending your lease so that it is no longer such a difficult prospect to sell or raise money against. The first question you probably have is: How much it will cost?

However, there's no easy answer to this. That's because lots of factors are taken into account when calculating the figure you eventually have to pay, including how long is left on the lease already, the ground rent and even the value of any improvements you may have made to the property.

A good place to start is the Lease Advisory Service's  (This link will open in a new window)lease extension calculator.

Bear in mind, this will only be an estimate. If you want a more precise idea of what it will cost, then you will need to speak to a professional surveyor.

There will be additional costs besides extending the lease. You'll also have to pay for the surveyor, for any legal advice you seek, Land Registry fees and even the legal and valuation fees for the freeholder.

Marriage value

It's important to note that the cost of extending a lease becomes steadily more expensive once it drops below 80 years.

That's because an additional factor – the 'marriage value' – is included when calculating the cost of the extension. The marriage value is only payable when there are 80 years or fewer unexpired on the lease, so if you want to keep the costs as low as possible, make sure you extend the lease before it drops below 80 years.

How do I extend the lease?

To qualify for a lease extension, you need to have at least 21 years left on the lease and to have owned the property for at least two years.

Your first step should be contacting a solicitor. While you could negotiate a lease extension informally with the landlord by yourself, it can be risky. You'll be safer having a keen legal eye going over the paperwork. It's a good idea to find a solicitor with plenty of experience in leaseholds.

Once you've done that, you'll need to work out the value of the lease. This is where the surveyor comes in; you can use the Royal Institution of Chartered Surveyors' ' (This link will open in a new window)Find a Surveyor' service to locate one in your area.

You can now inform the freeholder that you're applying to extend the lease through a Section 42 notice. You will make a formal offer at this point, while you may also need to supply a deposit of either £250 or 10% of the lease cost.

The freeholder may accept your offer or choose to negotiate. If the negotiations don't go anywhere then you can apply to the First-Tier Tribunal, which acts as an arbiter on lease cases.

The downsides of extending your lease

As you may have noticed, the actual process of extending the lease can be a lengthy one, particularly if the freeholder plays hardball in the negotiations. As a result, it's a really good idea to make sure you start any negotiations well in advance of your lease dropping down below 80 years.

There's also the cost to consider. Extending a lease is not a cheap exercise, so you will need to get your finances in good shape before proceeding.

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About the author

John Fitzsimons

John Fitzsimons is an award-winning financial journalist who has written for publications including the Sunday Times, The Mirror, Forbes, Moneywise and loveMONEY.

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