3 scenarios where a lease extension makes most sense

Annie Button has written an article that looks at the three scenarios where a lease extension makes the most sense, giving her observations and comments.

By definition, leasehold properties are depreciating assets. Residential Leases are granted for a variety of lengths, most commonly for 99, 125 or 999 years, giving the leaseholder the right to occupy the leased property and use it in line with the terms set out in the Lease. As the Lease runs down, the property reduces in value until, in theory, ownership reverts back to the freeholder at the end of the term.

A short lease is not only worth less, it also becomes less attractive to buyers as well as mortgage companies whose lending criteria are certain to include a minimum lease term remaining. With less than 80 years on the Lease, getting a mortgage becomes increasingly difficult, restricting the market for sale to cash buyers.

Leasehold tenants of residential properties have a legal right to extend their Lease. Under the Leasehold Reform, Housing & Urban Development Act 1993, a statutory lease extension will add 90 years onto the remaining Lease and extinguishes the ground rent. There’s also been renewed talk recently about the government’s plans for a leasehold reform, giving leaseholders the right to extend their Lease by 990 years, alas no legislation has been passed yet.

Clearly, it is in the benefit of the leasehold owner to extend their Lease at the earliest opportunity, preserving the value of their property as much as possible. While it is not strictly speaking necessary to extend a Lease with more than 85 years left to run, since that term length would satisfy most lenders (and therefore buyers), taking early action will save money and hassle in the long term.

Let us take a closer look at three scenarios where a lease extension makes eminent sense:

1. Selling the property

A lease extension can increase the property’s market value. The shorter the Lease, the lower the market price that can be achieved, while selling properties with a short Lease can be difficult to sell, as already mentioned above. Concurrently, the premium payable for a statutory lease extension premium goes up as the remaining Lease term goes down.

Whether a lease extension in preparation for the sale of the property makes financial sense depends on the remaining years.

The general advice is:

    • 90+ years or more remaining – no financial benefit in a lease extension
    • 90-80 years remaining – extending the lease will improve saleability
    • <80 years – lease extension may be a condition of sale, or the price may be much reduced

Postponing a lease extension until you are ready to sell may be unwise, since buyers may be put off by the short term and the inevitable delay in obtaining an extension at this point. A lease extension can take up to 18 months to complete, and although it is possible to initiate the process and transfer the benefit to the buyer, it is an added complication that may break the deal. Ideally, try to deal with a lease extension 6-12 months before putting the property on the market.

2. Remortgaging the property

A remaining lease term of 85 years or less will affect your ability to remortgage your property. This is an important point that many leasehold owners are not aware of. Changing your mortgage lender may be under consideration for a number of reasons, but the most likely scenario is that your fixed rate term is coming to an end and you are shopping around for the best mortgage deal.

However, if the remaining Lease term is unacceptably short, lenders will be unwilling to offer finance on your property, so you could be stuck with the uncompetitive terms provided by your current mortgage company. Until a lease extension on your property has been completed, you will therefore be missing out on lower interest rates and more attractive mortgage products available in the market. The problem can be avoided by thinking ahead and extending your lease in good time.

3. Reducing ground rent liability

Leasehold properties incur an annual ground rent payable to the freeholder as a condition of the Lease. The amount payable can vary widely, ranging from a peppercorn (i.e. nothing) to onerous clauses with ground rents doubling every 5-10 years – which has formed the basis of the recent ground rent scandal.

Not all doubling ground rents are unacceptable, but if your Lease contains a troubling ground rent clause along these lines, you may find your liability shooting up while sky-high ground rents will make it more difficult to sell the property.

What’s more, Leases with annual ground rents of more than £250 (outside London) or £1,000 (London) automatically become Assured Shorthold Tenancies, giving the freeholder greater powers of possession if payments are more than 2 months late.

One of the advantages of a statutory lease extension is that it does away with your ground rent altogether, so this a good way to resolve an unsatisfactory ground rent situation.

 

Kindly shared by Annie Button

Main article photo courtesy of Pixabay