Buying and selling short leases is a complex business. Indeed, lease lengths continue to fall with each day that passes – even in “lockdown”. This means it is particularly important if your lease is just about to drop below the 80-year mark (as after the lease falls below this unexpired term, the process generally becomes more expensive).
Whilst residential sales and purchases have slowed down, a lease extension may be the perfect opportunity for sellers to maximise on sale prices to coincide with when the market recovers. Lease extensions can also offer buyers an opportunity to take advantage of low property market values.
If you are a leaseholder, therefore, you should continue to seek legal and valuation advice as far as possible in advance to ensure you are able to serve your statutory notice(s) in time in this current climate.
WHY SHOULD YOU EXTEND YOUR LEASE?
As the number of years remaining on a lease decreases, a lease becomes more difficult to sell. Additionally, most lenders are reluctant to lend against leases where the unexpired term is less than 75/80 years.
The current “pause” in market conditions is arguably therefore the perfect opportunity to take advantage of low market values and time to embark on the process.
THE STATUTORY RIGHT
Under the Leasehold Reform Housing and Urban Development Act 1993 (‘the Act’) tenants of long leases have the right under the Act to extend their leases on the following basis:
- an additional 90 years to the unexpired term; and
- a lease on exactly the same terms as that which you have at the moment (subject to minor updating); and
- at a nil rent for the remainder of the term.
To exercise the right under the Act you must have a lease originally granted for a term of more than 21 years and have held your lease for at least two years.
HOW MUCH WILL IT COST?
The “premium” is a one-off payment payable to the landlord in return for the new lease.
When ‘marriage value’ (see below) is payable, the leaseholder will be faced with an escalating price. In broad terms, as the unexpired term of a lease gets shorter, the premium payable to extend increases in value. If a lease has less than 80 years unexpired then the price payable to the landlord is uplifted by one half of the “marriage value” which could be substantial.
“Marriage Value” – what is it?
The concept of marriage value is complex. In simple terms, it is the value of the flat when extended less the aggregate of the value before extension and the value of the landlord’s interest before extension. It is often mis-quoted as the difference between the value of the existing short lease and the long leasehold value but this takes no account of the landlord’s interest and is incorrect.
CAN I SELL A FLAT WITH A SHORT LEASE?
If a qualifying tenant is selling a flat, it is possible for them to serve a notice for a lease extension (after exchange of contracts) and assign the benefit of that notice to the buyer on completion. This assignment deed enables the seller to ‘step into the shoes’ of the buyer on completion. If not assigned, the buyer will have to wait two years before being able to serve a notice and that could significantly increase the price, particularly in prime Central London.
This invariably assists with the marketability of the property, however great care should be taken with the drafting of the documentation as a mistake in the drafting can have a detrimental effect on the incoming buyer. Having to wait a further two years with a short lease could turn out to be an expensive mistake! If the notice and assignment are drafted and served correctly, the investment could reap great benefits.
Whilst the consequences of the process going wrong can be disastrous, with the right specialist advisors on board the benefits can be extremely rewarding!
Whether you are a landlord or a tenant, if you have any questions on how to extend your lease, please contact Yashmin Mistry, Partner and Head of Leasehold by email / telephone: 020 7644 7294 or LinkedIn.