Millions of leaseholders in England and Wales are facing an increased risk of their property plummeting in value, or even becoming unmortgageable, as a number of lenders have recently increased their minimum unexpired lease term requirements to 85 years.

About 10 per cent of all owner-occupied residences are leaseholds – where the homeowner buys the right to live in a house or flat for a certain period. Leaseholds can run for up to 999 years, but in the 1980’s, builders of homes – particularly in sought-after harbour developments and coastal towns – started to sell them on 99 year leases.

However, as many buyers of those properties are finding, once a lease has less than 80 years to run, the value of the property begins to fall. Shockingly, up to five per cent of the value can be lost when the lease hits the 80 year mark. And with less than 60 years to go the value falls rapidly. This could make it tricky to secure a good mortgage deal, or even make the home impossible to sell.

The good news is that there are ways to overcome the “short lease” problem:-

Can I extend my Lease?

First of all, the landlord can be approached to see if they will negotiate an extension. But leaseholders should be aware that this may not result in a good deal. It may mean in the short term there is a big saving in fees, but parting with a large amount of money for what may be just an extra few years, and with an increased rent, may leave leaseholders feeling they are at the losing end of the bargain.Help is at hand, however, under the Leasehold Reform Housing and Urban Development Act 1993. Subject to having owned the property for a minimum of 2 years, a leaseholder is entitled to extend their Lease for an extra 90 years on top of what is remaining, and with the ground rent being reduced to a peppercorn (nil).

What do I do to start the process?

Going down the 1993 Act route involves the service of formal notice on the landlord. It should include certain information, crucially the price proposed for the lease extension, which should be calculated by a professional valuer. It is based on a formula designed to compensate the landlord for the loss of ground rent and the fact that the right to get the property back at the end of the term is postponed by 90 years.

In addition, once the lease term drops below 80 years, the landlord is entitled to half of the so-called “marriage value” which is basically the increase in value of the leasehold property thanks to the extension.

Many leaseholders are put off from going down this route because of the costs and professional fees involved. The leaseholder is required to pay the landlord’s fees in additional to their own, as well as the costs of the valuation. If the leaseholder pulls out half way through the transaction they will still be responsible for the costs and will also be prevented from exercising the right to extend for 12 months, during which time the price of extending the lease is likely to increase. However, if the leaseholder goes through the process in the long term they could be better off.

Can I transfer the benefit of the notice?

But what if a buyer loses interest whilst the seller completes the extension? If this is a concern the formal notice can be served on the landlord and a deed transferring the benefit of the notice to the buyer can be completed. This enables the extension process to be progressed post-completion, even though the new owner has not had the lease in their name for two years.

This is a particularly attractive solution where the lease has between 80 and 82 years left. To proceed otherwise would mean the new owner having to wait 2 years before they can compel the landlord to grant an extension and, in the meantime, 50% marriage value will have become payable on the price as the term will have dipped below 80 years.

So keep an eye on the length of your lease and remember:-

• Many lenders require a lease to be at least 85 years at the beginning of the mortgage term.

• After two years you can buy an extra 90 years to your lease.

• The ground rent will be reduced to nil.

• 80 years is the crucial cut-off point. Below that and the lease becomes more costly to extend.

• When selling a property, you can serve the formal notice on the landlord and transfer the benefit to your buyer.

www.deanwilson.co.uk