Should you extend your lease?
When you purchase a property that is subject to a lease, it is granted for a defined length of time as decided by the freeholder. Although a lease is usually granted for a term of 150 – 999 years, a long lease is considered as any lease which is granted for a term over 21 years. Here, Jessica Hughes explores the costs and requirements of extending a lease before its expiry date.
Although the usual term of a lease is somewhere between 150 – 999 years, property owners may find that the granted lease their property is coming to an end. Once the term of the lease has expired, the interest in the property will revert to the freeholder, if the term is not extended before the expiry date. So what are your options and should you extend your lease?
If your lease isn’t as long as you would like it to be, you can request a lease extension. The cost of a lease extension may ward off a leaseholder (you) from proceeding with an extension. The leaseholder would usually be liable for the costs of their own solicitor, who would approve the lease extension, and the freeholder’s solicitor, for drafting of the extension document. As well as the legal costs, the extension of the lease may come at a premium decided by the freeholder. The lower the term that is left on the lease, the higher the costs are likely to be. It could therefore be beneficial to you to extend the lease when there is a longer term remaining, this can be more cost effective as the premium is likely to be lower.
Most mainstream lenders (banks/building societies) will not lend to a borrower who is looking to purchase a property with 70 years or less remaining on the lease. Lenders have their own specific requirements which can be found in the UK Finance Mortgage Lenders’ Handbook, as this can vary.
Saleability and value
If the remaining term on your lease is lower than 80 years this can affect the saleability of your property and can also affect the value. If the property is down-valued due to the lease term remaining, this may result in a purchaser negotiating a lower purchase price. A purchaser is likely to be advised against purchasing the property without the seller covering the cost of the lease extension. It would therefore be beneficial to do this with a higher term remaining on the lease a discussed above. Proceeding with a lease extension simultaneously with a property sale can also delay the sale process, this can lead to a delayed completion date which can be frustrating for all parties involved.
Entering into a statutory lease extension means a freeholder would be under a legal obligation to grant the extended term of the lease for a peppercorn ground rent. Therefore, if the ground rent stated in your lease is currently £250 per annum and you enter a formal lease extension, this would be reduced to a peppercorn for the remainder of the extended term. A ‘peppercorn’ rent means that is a nominal or low value. In practice it is unlikely a freeholder is going to request a peppercorn from you as they would have no use for this.
You are eligible for a lease extension if you have owned a leasehold property for more than 2 years, which is subject to a long lease.
When considering a lease extension there are several factors to take into consideration; if this is done in good time it is likely to save you money and stress in the future, especially if you are considering selling your property.
By Jessica Hughes