Most people who own Leasehold properties will realise that the term left on their lease is hindering the sale or reportage of their property only when they try to sell.
Realising that the potential buyer is unable to obtain a mortgage due to the short term left on the lease, or if they are seeking to release equity are unable to do so for the same reason.
A lease may be extended either by agreeing new terms with the Landlord or by Enfranchisement.
Where this is done by agreement then the owner and the Landlord agree:
- By how much the term will be extended (Most landlords simply extend the lease so that there are 125 years left)
- How much the owner will need to pay the Landlord to agree to the Lease extension
- The ground rent payable
When the lease is extended in terms of Enfranchisement then provided the Tenant owner is a qualifying tents i.e. owned the property for more than 2 years then he is in a position to force the landlord to extend the lease by a term of 90 years so add an additional 90 years onto the remaining term of the lease. This is done by serving a notice on the Landlord setting out how much is being offered to extend the lease.
What is important is that when a lease is extended by enfranchisement the ground rent must be reduced to a peppercorn which in effect means that no ground rent is payable. Why is this important? Some Lenders will not offer mortgages if the ground rent increases exponentially or by more than 100 or 200% of the original value. This may reduce the potential market should the property wish to be sold.
This is the tipping point. The marriage value or premium payable starts to increase exponentially year on year once the remaining term dips below 80 years. It is therefore advisable to extend a lease well before that.
Whichever method is selected in order to extend the lease the following costs are payable:
- The Landlord’s legal fees
- Your own legal fees
- The premium or marriage value
- The costs of registering the Lease at the Land Registry
Should you wish to Enfranchise then you will also need to instruct a surveyor in order to determine the marriage value. The Landlord will instruct his own surveyor and you will also be responsible for these costs.
The Notices that need to be served for Enfranchisement are strictly regulated and if incomplete may result in the notice being invalid or if defective may result in you having to wait another 12 months before you are able to enfranchise.
Most Landlords will try and persuade a qualifying tenant to extend the lease by agreement and in do so by offering a reduced premium albeit for a shorter term and also emphasise the fact a surveyor is not required. Without a surveyor a Tenant will not know whether he is paying a fair price for the extension and it therefore makes sense to always instruct a surveyor who will be able to accurately determine the premium. The reason landlords are keen to avoid Enfranchisement is usually because of the term and the fact that the ground rent is reduced to a peppercorn.
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