Property News

Statutory vs informal lease extensions: What’s the best way?

The residential housing market is generally considered to be a safe place to invest. However, if you own leasehold property, as the length of the lease decreases, so does the value of your home. It’s called a wasting asset.

Ask any industry professional and you will be advised in no uncertain terms that you should avoid letting the term of your lease fall below 80 years, and to make sure you extend your lease well before you reach this limit. Why?

Renewing a lease that has less than 80 years left to run can be disproportionately expensive. The potential premium payable could be substantially higher because of an additional valuation element called ‘marriage value’.

Why is ‘marriage value’ so important?

The relationship between the freehold and leasehold value of a property is interdependent, as one leading London surveyor explains:

When you extend a lease the value of the lease becomes higher, and the value of the freehold becomes lower. When that lease is short the uplift in the value of the lease will usually be greater than the diminution in the value of the freehold. That additional ‘profit’ is called marriage value. Under the legislation, when a lease has less than 80 years left to run, 50% of the marriage value is payable to the freeholder when the lease is extended. This is why it’s financially beneficial to start the leasehold extension proceedings well before the remaining term falls below this point”, Peter Barry Chartered Surveyors.

What’s more, when it comes to selling your property, you might find that potential buyers would find it difficult to get a mortgage. Many lenders draw the line at 75 years, others at 70 years left on the lease. Let your lease term fall even further and it may be impossible to get a mortgage; you would have to target cash buyers only.

Having concluded that lease extensions are the only way to restore the value of your property asset, you now have two options: the informal route and the statutory route.

Informal lease extension

An informal lease extension process starts by making contact with the freeholder and negotiating the terms of the new lease. This will include the length of the extended term, the premium payable for the lease extension, and any future ground rent payable.

Taking the informal route has a number of advantages that shouldn’t be dismissed out of hand.

  • Lower legal costs compared to taking the statutory route

  • Quick turnaround since no formal procedure needs to be followed

  • No qualification criteria for leasehold owners

  • Less statutory control over the terms to be agreed. You could agree to simply top up the amount of years remaining by mutual agreement.

However, on the downside, this process offers less certainty and protection to the leaseholder. Should negotiations become protracted, the leaseholder does have the option of going down the statutory route, though much time and money may already have been invested in fruitless negotiations.

  • Either party can decide to change the terms or pull out of the agreement altogether

  • The freeholder is under no obligation to complete the process in any period

  • You may be required to pay the landlord’s legal fees and valuation costs upfront

  • The freeholder has more flexibility to propose less advantageous lease terms

  • The landlord can charge an inflated premium and impose a revised ground rent

  • No access to the Leasehold Valuation Tribunal to protect the leaseholder’s interests

  • Where the 80-year mark is approaching, the landlord might decide to prolong negotiations until a higher premium can be demanded

Statutory lease extension

Statutory lease extensions are governed by the Leasehold Reform Housing and Urban Development Act 1993. This legislation gives leasehold owners the right to extend the lease of their property upon payment of a premium to the landlord, which is calculated using the statutory formula.

In order to qualify for a lease extension, the leasehold owner must have owned (though not occupied) the property for at least 2 years. Whether you are looking to sell a recently acquired property, or buy a property with a lease approaching 80 years, this is an important consideration.

The main advantages of taking the formal lease extension route are:

  • You are guaranteed to obtain a 90-year extension of the existing lease term

  • Any ground rent payable under the existing lease reverts to a peppercorn (zero)

  • The terms of the new lease are governed by the 1993 Act, so that unreasonable terms can be contested

  • The valuation date is locked once notice is served, effectively stopping the clock

  • Leaseholders pay an initial deposit (which is protected), while the landlord’s recoverable costs only become due at the end of the process

  • Landlords pay their own tribunal costs

  • Absent, non-responsive or uncooperative landlords are not an obstacle

While you may be tempted to open communication channels with your freeholder in the hope of an easier process and reduced outlay on legal and valuation fees, beware that professional portfolio landlords may use the lack of formal process to extract maximum commercial advantage for themselves.

From onerous upfront admin fees to non-negotiable inflated proposals including dubious ground rent escalation clauses, you may lay yourself open to signing away important rights without the legal protection granted by the 1993 Leasehold Reform Act.

Source: 28/06/2019

Make a comment

Please use the comment box below. Please login first or create an account.
user avatar

Register For Free

Create an account for free today to unlock some great features of Net House Prices.

Instant House Valuation Credit report