Whether you are thinking of selling your flat or maintaining the value of your investment you may be wondering whether it is a good time to extend your lease. Where you have owned your flat for 2 years on a long lease (such as a 99 year term) you are likely to qualify for the right to obtain a lease extension.
A statutory procedure governs the timetable for obtaining a lease extension and its terms in particular the price payable so the Landlord can not deny you a lease extension or fix the price payable.
It has never been more important to improve the value and saleability of your flat especially if you are proposing to sell your flat in the near future. So should you get on with extending the lease at your costs now or wait and see if you can find a buyer for your flat with its existing lease? A few factors you should consider are:
- In the current climate there are certainly a wider range of similar properties on the market and buyers are certainly more concerned about the length of the lease, a share in the freehold is held and whether the block is well managed.
- In previous years in the very buoyant market with a high demand for property buyers were often not deterred by a short lease or management problems affecting the block and were often willing to proceed on the basis that the seller just started the statutory procedure before completion leaving the buyer to deal with the procedure and pay the premium for the lease extension in their own time after they had bought the flat with its existing short lease. In the current market some buyers may simply not consider a flat with a short lease cutting down those even looking at your flat and for those that do consider it they may use this (and any other excuse) to seek a reduction to the purchase price.
- Due to the uncertain market mortgage lenders are tightening their lending criteria and therefore may not offer mortgages to property owners with short leases. Lenders are increasing the deposit the buyer has to put into the purchase leaving them unwilling or unable to pay an additional premium after completion to extend the lease or participate in a collective action to acquire the freehold.
- Purchasers are often willing to pay more for a longer lease or a flat with a share in the freehold. In addition if the tenants own the freehold themselves the prospect of a well managed block with reasonable services charges will be more appealing to a potential purchaser. If your block is poorly managed or the service charge is too high then you might want to consider the Right to Manage.
- Starting the statutory procedure (by serving an “Initial Notice” fixes the valuation date by reference to which the premium will ultimately be calculated. So if the market recovers subsequently then the comparables used to calculate the price of the lease extension will be lower than they would have been later (and vica versa).
While no-one knows where the property market is going to go without a decent crystal ball you may wonder how much it needs to fall by to leave you paying broadly the same premium in, say a year as in the event you started the statutory procedure now. A specialist valuer would need to advise you on this.
- Once the remaining term of your lease drops below 80 years then Marriage Value becomes payable which greatly increases the premium payable for the Lease Extension. This element of the premium will increase as the remaining term of your lease gets shorter. The effect on the premium differs depending on whether you are just under the 80 year mark or sailing close to the final few years of the term.
- Deferment rate – as you may know deferment rates have been fixed for houses at 4.75% and flats at 5% in the above case. Again, this is open to being appealed perhaps by one of the estate landlords in which case should they be successful in achieving say a deferment rate of 4% for flats then this would increase significantly the premium payable to your landlord for a new lease.
So where you have decided to sit the market out until it hopefully recovers you might want to take this opportunity to improve the value of your asset and its marketability down the line by completing the lease extension at this stage which does take time. The statutory process normally takes between 6 and 12 months to conclude.