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October 27, 2010
Extending Leasehold on Long Lease Houses
by The Josh
Long Leaseholds are a common part of luxury property purchases in London. Some flats are Share of Freehold but most are sold off on Long Leaseholds. Even some terraced houses are Leasehold properties if they fall into one of the larger estates that own most of Mayfair, Chelsea, Kensington and the surrounding areas. As discussed previously, Long Leaseholds may or may not be a deal breaker depending on circumstance. A Long Leasehold over 100 years that you have no intention improving beyond cosmetic work is as good as a Freehold. On the other hand, any property you intend to do major works on (since any works must be approved by the Freeholder) or has a lease of under 80 remaining (since banks will not lend against such leases) will cause some problems.
There is now a growing problem in Prime Central London, though, as previously acceptable Leaseholds begin to wind to a close. It is not uncommon to see areas like Belgravia, Knightsbridge and South Kensington market properties with 25 years or fewer left on a property. As Leasehold properties originally sold around the turn of the last century continue to be resold, it leads to the question of how useful a short Leasehold is as a property purchase.
The basic answer is not very much. Most properties with such a lease are not sold at enough of a discount to make it worth buying. Many times properties with 10 year leases are more expensive than paying the rent for those ten years in advance.
You do not have to lose your home when a short Leasehold runs out however. Leasehold Reforms have progressed to the point that the freeholder is obligated to extend a lease by 90 years or offer a share of freehold at a reasonable price. The price is a reflection of the lost ground rent income, the value the freeholder loses by extending the lease and therefore not using the property for other purposes and the added value of the property will experience after extending the lease.
Likely, this will cost more than it would to purchase a home with the lease already extended. The price of the unextended lease will reflect the lower purchasing value, but the premium for extending a lease is comprised of the cost of cancelling the current lease as well as extending it. If you are planning on buying or selling a Leasehold and extending it then there are a couple of things to bear in mind. First, you must have owned the property for two years before the Freeholder is obligated to extend the lease. If you are looking for a quick extension, it will have to be secured by the seller; however, the agreed premium can be passed on to a new owner. Second, you must present a reasonable figure. Get a professional valuation done in order to find the appropriate value of the current lease and the extension. It may be worth discussing the extension with the freeholder beforehand as well. You may be able to agree to a neutral valuation, saving time and money, and even extend the lease outside of the leasehold reform act, saving on some legal fees. Finally, don’t delay. A leasehold is worth less as the time runs out, so the premium will cost more the longer you wait. As well, property values will increase over time, making the extension more expensive.
Why would you buy a Leasehold property with less than 80 years left on it? First, if you can negotiate the seller and freeholder down to a combined price that is equivalent to what you would otherwise pay, then it will come out in the end. You will have to pay a premium for the extension, but will get a discount for buying a shorter leasehold. Second, if there is some reason you would want to delay purchasing a longer lease and buying in stages. You may not want to mortgage the property, so you can purchase the leasehold at a discount now and then purchase the extension (pay for the rest, effectively) at a later date. This may cost more though, as you will pay a premium for the lease which will only get more expensive over time. Finally, the property may be good enough that you would pay a premium for it. If it is designed or located in an area that is appealing enough for you, then the premium required for extending the lease may be worth paying.