Why you should not delay extending your Lease
Essentially, a lease is a contract between two people which enables the ‘tenant’ to occupy the leased property to the exclusion of all others and to use the property in line with the terms set out in that contract. Most leases are granted for a set period of time, known as the ‘term’ of the lease. Residential leases are granted for various lengths but the most common tend to be 99, 125 or 999 years.
Over time, the lease term begins to run down and, if the tenant took no action at all, the lease would eventually run out and the tenant would no longer have a right to occupy the property. At this point, the property would return to the ownership and occupation of the landlord.
Clearly, this would be a terrible situation for the tenant which is why tenants of residential properties have a legal right to extend their leases – i.e. a tenant can pay money to their landlord to buy extra years to add to their lease term.
A short lease will also decrease the value of the flat or house because it becomes less attractive to buyers, and their mortgage lenders, who know that they will eventually have to pay to add more years to the lease term to protect their property.
There are two ways that an extension can be achieved – the landlord might be willing to offer a lease extension to you or if you have owned your leasehold property for at least two years, you are entitled to compel your landlord to give you a 90-year extension to your existing lease at a ‘peppercorn rent’.
The main point to note here is that the shorter the term of the lease, the more money you will have to pay the landlord to extend it.
The general view is that you don’t have to extend a lease with 85 years or more remaining on the lease term. Certainly, that term length would be enough to satisfy most lenders and therefore buyers. However, bearing in mind the above, we would always recommend that you extend your lease at the earliest possible. Taking early action will save you money AND hassle in future.
Should I extend my lease before trying to sell?
Extending a short lease can add to your property’s market value. Generally, the shorter the lease, the lower the market price you will achieve
You are unlikely to be able to realise your property’s true market value with a short lease term particularly where it has dropped below the number of years which a lender would find acceptable – i.e. 80-85 years remaining. This is because buyers will quickly realise that they will shortly have to take on the expense of extending and will factor that into the price they are willing to pay. In addition, when the lease gets too low, lenders will not be willing to lend buyers money to purchase the property and so you will only be able to sell to cash buyers.
Whether to extend your lease before selling largely depends on how long you have left on your lease at the point of sale. The general rule of thumb in the past has been:
- +90 years = not worth extending
- 90-85 years = worth extending (this will improve saleability)
- 85-80 years = worth extending (or getting the lease extension process started)
- Less than 80 years = you will need to extend or accept a much lower sale price
Most buyers are alive to the issue of term length now due to the press coverage surrounding leasehold properties and where a 99 year term was deemed acceptable previously, more purchasers want to see 110-125 years left on a lease.
Many owners of leasehold properties make the mistake of delaying obtaining a lease extension until they want to sell. The inevitability of this, is discovering that potential buyers don’t want to purchase a short lease or cannot get a mortgage unless the lease has been extended.
Trying to obtain a lease extension at this point can be very challenging. It can take anything from 2-18 months to complete a lease extension. This kind of delay would put most buyers off! Conveyancing is complicated and delays can lose you your buyer. Don’t wait until sale to extend. Ideally you should try to deal with any lease extension at least 6-12 months before selling if you can.
Should I extend my lease before obtaining a re-mortgage?
A short lease will affect your ability to re-mortgage your property if the term isn’t long enough for your lender. You may well have seen an attractive mortgage product on offer, but if your lease is unacceptably short for the lender, you could miss out on a lower interest rate. Worse still, you might get to the end of your fixed rate and have to pay a much higher rate until the lease extension is sorted out. If your lease is below 85 years – you are likely to encounter an issue.
Should I extend my lease to avoid ground rent issues?
Ground rent is a fee you must pay to the freeholder of your property as a condition of your lease. Unlike service charge payments, the payment of ground rent does not go towards the services in the building that you have the benefit of. It is purely a source of income for your landlord.
Ground rents have been payable on leasehold properties for many years and one of the arguments for retaining them is that without them, why would the owner of the freehold continue being interested in managing and maintaining the estate for the benefit of the tenants? There may be some merit to that argument, however, in recent times the level of ground rent payable by a tenant has gone from £50 or so a year, perhaps doubling 3 times in a 99 year term, to increases every 5 or 10 years starting at £250 which lead to thousands, if not millions, being payable by the end of the term which would clearly be unaffordable.
Not all doubling ground rents are unacceptable, particularly where they started low and don’t increase very often. However, if your lease contains a troubling doubling ground-rent clause, it will be more difficult to sell your property. Again, this will impact on the marketability and mortgageability of lease when you come to sell. Some high-street lenders may not agree to offer a mortgage on a property with a doubling ground rent clause, so this is something to watch out for.
Importantly, leases with a ground rent of over £250 per year (outside of London), or £1,000 per year (in London) automatically become Assured Shorthold Tenancies. This gives the Landlord the right to seek possession of the property more easily than usual if the ground rent is unpaid for more than 2 months. Lenders and lawyers have become increasingly wary of this unintended impact of higher ground rents.
One way to resolve the issue of an unsatisfactory doubling ground rent is to exercise your right to a statutory lease extension. In addition to adding years to your lease term, you can also reduce your ground rent to a peppercorn (whether your landlord likes it or not!).
An alternative is to try to agree a variation to your ground rent with the landlord. We have found that most landlords are sympathetic to the problems that tenants are experiencing with doubling ground rents and are keen to try to come to a satisfactory solution.
Call us if you would like to discuss this further.
Should I extend my lease to amend any defects in my lease?
Some leases are drafted in such a way (primarily older leases) where they could be defective against modern conveyancing standards. This could be because there is some error/emission in the lease, covering matters such as a repair/maintenance clause etc. This can cause problems when trying to sell a property as it can affect a potential buyer’s ability to obtain a mortgage. Some lenders may refuse to lend money to purchase a leasehold property if the lease does not cover certain provisions, forcing the buyer to withdraw.
Our experts will review your lease and consider whether there are any problems or defects as part of the lease extension process. If we spot any issues then we will let you know and we will seek to negotiate a variation of your existing lease as part of the lease extension process to resolve the defect if possible. Not all solicitors will take this extra step for you – some will only extend the term and change the ground rent - but we consider this a crucial opportunity to try to avoid future problems.
Should I extend my lease in order to avoid the ‘marriage value’ trap?
‘Marriage Value’ is the increase in the value of the property following the completion of a lease extension – i.e. it reflects the fact that a longer lease has a greater market value than a shorter one. It is a rather complex area which is outside the scope of this article, but put simply, when a lease falls below a term of 80 years, the freeholder is automatically entitled to an increased premium.
This means that the day before the lease term falls below 80 years the freeholder isn’t entitled to receive the marriage value, the day after he is! This can increase the premium considerably.
You should always look to extend a lease before it hits the 80-year mark. Check your lease now and make sure you’re well above 80 years. If it’s coming up – get in touch immediately to avoid spending more on a lease extension than you have to!
If any of the above applies to you, or you would like further advice in this matter, please contact one of our specialist Leasehold Enfranchisement team at Mayo Wynne Baxter. We are experts in the field and members of the Association of Lease Extension Practitioners (ALEP). Our team can provide advice you can rely on.