In 2017, London School of Economics (LSE) reported that some leaseholders are being asked for gratuitous costs to extend property leases.
Researchers from the LSE analysed information from the sale of 8,000 leasehold properties in *Belgravia, Chelsea and Mayfair over a five year period between 1987 and 1992, and concluded that the number of years left to run on a lease was reflected in the sale price achieved.
This raises the question: do current methods underestimate the value of leasehold property?
Caxtons Chartered Surveyors’ leasehold residential property expert, Charles Oliver provides the following guidance:
Extending a lease on a leasehold property:
- Usually, leases start off on either 99 or 125-year terms.
- As the time on a lease reduces, the value will also diminish.
- It could prove difficult to sell, and it becomes more difficult to get a mortgage on a property when there is less than 60 years to run.
- If the flat and leaseholder are eligible, and the leaseholder has owned the flat for 24-months, they may extend the lease by 90 years without paying any ground rent.
- The cost of extending the lease will be based on the value of the ground rent due; and the remaining length of the lease - the shorter the time left, the more costly it will be to extend.
- The price will take into account that the landlord must now wait another 90 years before realising the full market rent, and the loss of rental income in those intervening years.
- The fee to extend a lease that has fewer than 80 years left will increase, because the freehold and leasehold values before and after the lease is extended are taken into consideration in the equation and the landlord will be entitled to 50% of the increase – this is known as the ‘marriage value’.
- Legal and surveyor costs will also be the responsibility of the leaseholder.
- The Leasehold Reform Housing and Urban Development Act 1993 has defined deadlines to adhere to.
- Information about the landlord may be obtained by the leaseholder.
- The landlord or his surveyor may attend the property in order to value it; he can request a deposit of 10% of the leaseholders ‘offer’ and ask for evidence that the leaseholder is entitled to extend the lease.
- Leaseholders must ensure all finances are in place and that relevant documents are available.
Collectively purchasing a freehold with other tenants:
- If a majority of the eligible leaseholders in a block with less than 25% non-residential content collaborate, they may collectively purchase a freehold; in this case the 24-month ownership requirement does not apply.
- If the landlord is not protected and the building fulfils the criteria, as long as the requisite number of qualifying tenant want to share ownership, then they can compel the owner of the freehold to sell to a Right to Buy company or a nominated purchaser. Flat owners will then have a share in the property through the company and will take on the role of their own landlord. This is known as enfranchisement.
- Fees to purchase will be similar to those for extending a lease although it will take into consideration the value of all the leases pertaining to the property and that the landlord will lose all future rental income.
Landlord and Tenant Act 1987:
- A landlord may wish to sell to a third party but is duty bound to give tenants first refusal (terms apply).
- If the landlord wants to sell at auction he must give tenants notice of four months’ in order for them to stake their claim to match any successful offer.
Charles also points out that if there is no agreement over the price with either of the options set out then it should be referred, within a six-month deadline, to First-Tier Tribunal – an independent adjudicator – who will fix terms.
Charles is an associate director of Kent based property firm Caxtons Chartered Surveyors and specialises in valuations, landlord and tenant negotiations, expert witness reports, compulsory purchase and leasehold enfranchisement valuations on residential property. Caxtons Professional Services team has the expertise to help you with all your commercial and residential property needs. Contact Charles via email@example.com
*The London areas used in the research have some of the highest concentration of short leases in the UK and have historical property data available.
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