As the lease gets shorter and the number of years goes lower, the value of the lease decreases and it becomes more expensive when you extend the lease. Sometimes it is difficult to sell a property with a short lease because mortgage lenders may be reluctant to lend money on such properties.
If you are lucky enough to own a flat and a share of the freehold the good news is that the process of extending is relatively straightforward and the costs are fixed (and low). The first step is to agree this with the co-owners. You cannot usually act alone however extending the lease will benefit everyone.
The freeholder owns the land the property is built on, which means you, as a leaseholder, have to pay 'ground rent'. Once the lease expires, the property reverts 'back' to being a freehold property, where both the building and the land it is on are under the ownership of the freeholder.
A Section 42 Notice is a formal request from a leaseholder to extend their lease; it is given pursuant to the Leasehold Reform, Housing and Urban Development Act 1993 and entitles a leaseholder to an additional 90 years on top of their remaining lease term, and the reduction of their ground rent to a peppercorn.
Typically, leases are between 99 and 125 years, though some extend to 999 years and some can be as short as 40 years.
146 that a freeholder cannot grant a lease of land to himself alone (notwithstanding the exceptions and wording of section 72(2), (3) and (4) of the Law of Property Act 1925.
If however, you are paying the current market price as if the property had a full lease then the seller should pay for the lease extension premium. The seller will know they have a weak position if they have a lease under 80 years so make sure to factor in all the costs of extending the lease when making your offer.
Ownership on a leasehold basis gives a right to an occupation and the use of a flat for a lengthy period – that is, the term of the lease. Many flats on new developments are for 999 years. And those bought from the council under the Right to Buy scheme would be for 125 years. Many others are for 99 years.
To request a lease extension, submit a formal letter containing all the pertinent details your landlord needs to make a decision. The letter should include: Your name, current address and contact information. Date the lease extension request is submitted.
It can be concluded that it is very difficult to change terms in a lease unless 100% of the parties (which will include the freeholder) are in full agreement with any variation being proposed. Even if a significant majority are in favour there are several hurdles that may prevent a variation being achieved at an FTT.
The majority of residential leases used to be for a term of 99 years, but more recently leases on modern purpose-built flats have been for 125 years or longer. The simple answer then is yes, there is no problem in principle in buying a flat with a short lease provided that its price reflects this fact.
94 years is still quite a lot. Never let it go below 80. However you should ask the vendor to extend it out to 150 years, or more. It won't cost them much, and its worth doing during the purchase as it makes everything simpler.
Pretty much every leaseholder has the right to extend their lease under the 1993 Leasehold Reform Act and if you have <100 years remaining on your lease you should consider it. The process itself is straightforward enough, although you will need to engage a solicitor and (probably) an independent valuer/surveyor.
The premium is the total of three elements:
- The amount by which the open market value of the landlord's interest in the flat is reduced as a result of the grant of the new lease;
- 50% of the 'Marriage Value' (where the existing lease has an unexpired term of less than 80 years).
In most cases, a flat that comes with a lease of 99 years or more will be valued at around 99-100% of the price that the freehold reversion (the freeholders interest) would be on the same flat. And, as the lease gets shorter, this relativity will decrease.
The informal route is where the leaseholder simply contacts their landlord (usually the freeholder) to try and negotiate a lease extension. There are no rules if the leaseholder uses this route and the landlord could refuse to extend their lease, or could ask whatever price they like for doing so.
It might seem after reading this guide that buying a leasehold property isn't worth the hassle. But far from it. If you've fallen in love with a property that happens to be leasehold, there's no reason you shouldn't go ahead and purchase it. Leases themselves aren't an issue – it's bad leases that are the issue.
The lease of a flat can be extended any number of times. If you have owned your leasehold property for more than two years, you can extend your lease formally or informally. After that, you do not have to wait two years for another extension. Further extensions can be made for an unlimited number of times.
Because of this, the law gives the leaseholder (tenant) the right to extend their lease once they have owned it for two years. The right is to add 90 years to what is left on the existing lease at a 'peppercorn rent'. A peppercorn rent means that no ground rent is paid.
