If the concept of a leasehold property seems confusing don’t worry. It doesn’t matter if you are British or based overseas, it is a subject that causes much confusion, when in fact, buying a leasehold property often produces better returns than a freehold or share of freehold.
Yes, I know that this seems odd, but many buyers ignore leasehold properties when they should actually be actively looking for them.
This article will show you the mechanics of how to extend a lease. Ultimately you will need an expert to help you, but it is very likely that you will not need to extend the lease right away (although every situation is different) and it is useful to understand the process.
However, if you would find it easier to have it explained to you in person, then please just call us on 0800 389 4280 (+44800 389 4280 from outside the UK) or email email@example.com to schedule a call.
So, if an apartment has a qualifying lease you’re entitled to extend the lease for 90 years in addition to the current lease. So, for example, if the lease has 50 years until expiry, you can extend it for an additional 90 years, so you would have a 140-year lease in total.
In order to extend the lease there is a formal procedure you must undertake and it’s essential that you have a highly experienced solicitor and surveyor representing you.
Firstly, you must give the landlord a formal notice that you wish to extend the lease or buy the freehold. The landlord must respond with a formal counter notice within two months. However, the valuation of the lease will be taken from the date of your formal notice. This prevents either side delaying the procedure for their own benefit if the market is moving in their favour.
How long will it take to reach an agreement? This very much depends on the complexity of the negotiations. There are numerous factors that need to be taken into consideration when valuing the cost of the lease extension. This includes the freehold value of the property, any potential “marriage value,” and the ground rent (a sum that is payable on an annual basis to the landlord. This varies from building to building and can be one pound or several thousand pounds). Valuing the lease extension is part science and part art, because the value of the property on the long lease can be debated. Therefore, there will be a process of negotiations to agree the price of the new lease, so it’s essential that you have a surveyor who is highly experienced.
Of course you may be concerned that the landlord may demand an unreasonably high price and that you’ll not be able to reach an agreement. In such instances you can refer the case to the Leasehold Valuation Tribunal, which is a quasi court. They are impartial and their verdict is binding. There is the right of appeal, but ultimately you are appealing to them and they will review, but their final verdict is binding and it means that a landlord cannot enforce an absurdly high demand for the extension and conversely you, obviously, cannot enforce an absurdly low one. There will be lots of comparable data that both sides will be using to justify their valuations. Because the cost of going to the Leasehold Tribunal is quite expensive, you should strive to reach an agreement before you go there.
I will not go into more detail about the mechanics of the valuation itself as quite frankly it’s extremely complicated, will take too long to explain here and will just add a level of confusion you don’t really need. Suffice to say you need to be represented by an experienced team with a proven track record.
Ultimately there is nothing intrinsically wrong about acquiring a short or medium term lease. The key is to understand firstly what the property will be worth on a long lease of, say, 125 years. Secondly, how much will the lease extension cost? Once you’re confident with these answers you can then decide whether or not the short lease represents an opportunity. Unfortunately, this is where many buyers make a mistake because they underestimate the cost of the lease extension or overestimate the value of the property on the long lease.
Now, this is a very simple overview of leases and lease extensions. You may feel that the process is rather complicated and that there are too many variables. Indeed if you have not got the time or the expertise then you should avoid leases under 80 years. Anything over this length is still very easy to sell and the costs of extending the lease are relatively small as a percentage of the value of the property. But because the process is complicated there are sometimes opportunities to make a great investment, so if you have a good team you should include short leases in your search parameters.
Acquiring a Share of the Freehold
Now to obtain a share of the freehold is slightly more complicated in the fact that obviously you’re not just extending the lease of one property. To qualify for a share of the freehold, at least 50% of the apartments in the building have to apply for a share of the freehold and they obviously have to be on qualifying leases as well. So, in larger blocks this is quite a difficult thing to organise; if you have got 80 or 100 apartments in the block, you need to get a considerable number of people together who want to do it and then co-ordinate that. But it can be done; it just requires a certain degree of patience and organisation, especially if there are absentee owners who live abroad, rarely visit the apartment, and are hard to contact.
One thing I would say about applying for share of freehold is that it’s often attractive because it gives you management of the building. Therefore you have a certain degree of control, especially if the previous landlord was not looking after the building properly, was charging far too high a service charge, or was not keeping the building to a standard to which you would expect. However, some people apply for share of freehold purely because they think ‘Yes, we must have this,’ despite the fact they have long leases and the landlord is looking after the property well and at a reasonable price. This can be a mistake, because then you have to deal with the management of the building, and this can be difficult. You may employ someone to manage the building but disputes may arise and the hassle factor may be pointless for you. If you’re on The Grosvenor Estate, they manage their buildings incredibly well and you get their economies of scale, so you may decide that it’s more aggravation than it’s worth acquiring the share of freehold. It’s something you need to consider very carefully, and extending the lease by 90 years may be the better option.
As I mentioned earlier, this may seem rather confusing and you may well still be worried about acquiring a leasehold property. Please don’t be as I have owned several leasehold properties and never had a problem. But, it can seem overwhelming, so if you would like more information on short leases or acquiring leasehold properties in general, please do contact us on 0800 389 4280 (+44800 389 4280 from outside the UK) or email firstname.lastname@example.org
Yours for a successful home acquisition,