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Getting to grips with Leaseholds: the long and short of it

PUBLISHED: 17:23 31 July 2014 | UPDATED: 17:23 31 July 2014

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Thinking about buying a leasehold property or perhaps you are contemplating extending your lease? Shilpa Mathuradas, partner and expert property and enfranchisement solicitor at local Camden firm Osbornes Solicitors LLP discusses what you need to think about when extending your lease.

Whilst it is always open to leaseholders to approach their landlord on an informal basis to extend their lease, you can only qualify for a statutory lease extension once you have been a registered proprietor for two years.

It is therefore always advisable when purchasing a leasehold property to consider whether the then vendor should serve the statutory notice and then assign the benefit to you. If this is not done you will have no option but to wait two years before you can begin the process of extending your lease.

Compensation to the landlord

The statutory lease extension (under the Leasehold Reform, Housing and Urban Development Act 1993) allows a leaseholder to extend the lease by 90 years which will be added to the unexpired term at a peppercorn ground rent in return for compensation payable to the landlord.

The compensation reflects the reduction of the landlord’s interest in the property. This compensation makes up for the loss of ground rent for the remainder of the term plus the loss attributable to the additional 90 year wait for the reversion.

When to extend

Once leases fall below 80 years the compensation payable to a landlord in return for a lease extension can be much higher. This is because where there is less than 80 years remaining the sum you have to pay your landlord will have to include 50% of the marriage value.

Marriage value is taken as the potential for increase in the value of the flat arising from the grant of the new lease. The act requires that the ‘profit’ made on the grant of a new lease be shared by both the landlord and the leaseholder. Generally, leaseholders should take specialist advice on the compensation payable.

Selling a property with a short lease

A further reason why a leaseholder should consider this early is because the shorter the lease, the more difficult it will be to sell the property. The reason for this is that many mortgage lenders often make any lending conditional upon a minimum term. The minimum terms can vary from lender to lender but generally most lenders will refuse to lend where the unexpired term is less than 55 years.

Consequently potential purchasers in such circumstances will have to be cash purchasers. Re-mortgaging may be a problem for the same reasons although sometimes a re-mortgage may be offered in the case of a short lease although it may be at a higher rate of interest.

It is therefore important for leaseholders or someone thinking of purchasing a leasehold property to consider the implications of delaying the extension of their lease as this may prove to be a more costly decision in the long run.

There are a number of online calculators which will provide you with an estimate of how much it will cost to extend your lease, however professional advice should always be sought.

For more advice from Osbornes Solicitors, visit osbornes.net


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