What are the benefits of extending my lease?
There are several benefits to getting an extension on your lease including:
You can extend your lease for an additional 90 years on top of your unexpired term, meaning that your flat is mortgageable and saleable;
Your ground rent is reduced to nil from completion of the lease extension;
A lease is a wasting asset, which means that the shorter the term becomes the less it is worth so a longer term inevitably increases the value of the flat;
A lease extension will increase the value of your property if you wish to sell, a longer term is more appealing to potential buyers;
Lenders are becoming more conservative on lending against flats which have short leases. Most lenders will refuse to lend where a lease drops below 55 – 60 years. This means that you may have difficulty re-mortgaging yourself, or if you come to sell the flat then any prospective buyer may be unable to obtain a mortgage over the flat; meaning that your flat may become unsaleable.
Extending my lease – when should I do it?
The short answer is sooner rather than later.
There is a major benefit in extending a lease promptly. When the lease drop 80 years unexpired term the premium payable to the freeholder rises sharply, and continues to rise dramatically as the lease becomes shorter. The reason for this is that the landlord is entitled to what is know as the ‘marriage value’. The marriage value is the increase in value of the flat once the lease has been extended (i.e the profit). On average, a flat with a longer lease is worth more than a comparable flat with a short lease. This ‘profit’ element is only achievable because the freeholder has granted a lease extension and consequently the freeholder is entitled to 50% of this profit.
Furthermore, it’s usually a good idea to try to extend the lease when the housing market is depressed. The reason for this is that the premium payable is broadly based on the value of the flat and so lower property prices are likely to mean that you pay a lower premium. Historically, property has the tendency to rise and so if the housing market improves you will benefit from this as you have already paid any marriage value to the freeholder and, as this is a one-off payment, you can benefit from any further rise in the property market.
What happens when my existing lease runs out – can I still extend it?
At this point the freeholder is under no legal obligation to extend your lease as the lease has expired. This means that you have no lease to extend or sell. The interest in the flat then reverts back to the freeholder.
Therefore if you know your lease is close to expiration, you should seek legal advice as soon as is possible.
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