When surveyors describe a lease as ‘short’ they almost
certainly mean that there are less than 80 years of the term remaining and the
reason why that is significant is that a lease with an unexpired term of less
than 80 years becomes considerably more expensive to extend. It is therefore
important to be aware of the length of your lease and to initiate the process
of extending before it become prohibitively expensive.
Once the unexpired term of a lease falls below 80 years
not only does it immediately become more expensive to extend but the cost
accelerates with every passing year.
The ‘rules’ for extending a lease are found in the
Leasehold Reform, Housing and Urban Development Act 1993 (the Act) and a new
lease created under the Act will:
- Have a term expiring 90 years after the termination date of the original lease.
- Be at a ‘peppercorn’ (i.e. zero rent).
- Retain any other provisions that were present in the original lease.
The first step in extending your lease is to have a
valuation prepared by a surveyor specialising in leasehold matters. The
surveyor will inspect the property, take accurate measurements and make a note
of any improvements you have made. He will also want to see a copy of your
lease.
Using this information he will calculate what he
considers to be a reasonable sum of compensation payable to the Freeholder in
return for granting a new longer lease.
The compensation (often referred to as the ‘Premium’) is
generally made up of three parts:
Part 1: Compensation for loss of ground rent
As mentioned above, once the new lease has been granted
there will be no further ground rent to pay. The Freeholder is therefore losing
that future income and must be compensated – calculation tables are used to
work out what the current value of the right to receive those future ground
rents is. If the ground rent was due to increase in the future that must be
factored in to the calculation.
Part 2: The Reversion
A lease of set length will ultimately run its course and if
that were to happen the leasehold asset would be returned to the Freeholder at
the end of its term. If that day is postponed for a further 90 years there’s a
loss to the Freeholder and compensation must be paid. The current value of the
right to receive a flat worth say £250,000 in 78 years might be in the region
of £5,000 so the surveyor must ask ‘how much would I need to invest today to
receive £250,000 in 78 years time?’ and add his answer to the premium.
Part 3: Marriage Value
Marriage value is what makes it so much more expensive to
extend a lease that is shorter than 80 years. A property with a new lease, of
say 167 years, will be worth more than the same property with its original 78
year lease. Our £250,000 flat may be worth £270,000 with its new long lease and
under the terms of the Act this increase in value must be shared equally
between the Freeholder and leaseholder, therefore a further £10,000 is added to
the premium. If the original lease term is more than 80 years any marriage
value is disregarded.
Having received your valuation the next step is to serve
notice on the Freeholder. The notice informs the Freeholder that you wish to
exercise your right to a new, longer lease under the Act and sates how much you
intend to pay (the valuation figure).
The Freeholder will have 2 months to respond with a
counter offer – that will generally be done via his solicitor and include his
own surveyor’s valuation. There is then likely to be a period of negotiation
between the parties’ surveyors which will hopefully result in a compromise
figure. If a stalemate is reached the matter can be referred to the Leasehold
Tribunal who will have the final say.
The main benefit of applying for a lease extension
under the Act, as opposed to by informal negotiation with the Freeholder, is
that you know the lease will be granted at a reasonable premium and within a structured
time frame.
Written by Justin Burns BSc MRICS of Peter BarryChartered Surveyors
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