WHAT’S THE DIFFERENCE BETWEEN A LEASEHOLD & FREEHOLD

In a nutshell, the freehold owner owns the land and building present on the site (ignoring any Crown rights or other mineral extraction rights say), and as such can without Local Authority/Govt. requirements, do pretty much whatever they like to their land and/or building.  The freeholder owns the land and/or building in perpetuity (forever unless/until they transfer ownership) and is not bound to ask permission from a landlord say.

A Leaseholder, however, occupies the land and/or building for a term of years and that will be as outlined in the lease documentation.  Typically, modern leases, have a starting point of 125 years, however there is no fixed rule and leases can be for longer or shorter periods.

The Leaseholder will have to comply with the terms of the lease, likely also paying a ground rent and/or service and maintenance charges.  As the un-expired (amount of time left until expiry of the lease) falls, the value of the property can also fall and some lenders may also refuse to lend money on properties with leases of less than 70 years.  However that’s not all.

Once the lease of your property, typically a flat, is less than 80 years, even by a day, the cost of a lease extension will increase exponentially, as marriage value (i.e. the value of marrying the existing lease term into a longer term) is then payable and this can be tens’ of thousands of pounds, with more when legal and professional fees are factored in.

Once the unexpired term is approaching 80 years, you should start to act to preserve the value of your property and you may have legal rights to extend the lease of your property for a further period, more information is available here https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/9432/leaflet.pdf

WHY IT MATTERS

As the un-expired term of your lease falls, so can the value!  You will have to discuss an extension with the Freeholder and this can involve lengthy and expensive negotiations, often involving both legal and surveying professionals.  The costs only get higher the longer you leave it and the impact upon saleability and/or value more profound.

If you are planning on holding off until it’s close to the time to sell, you may find that the process results in a delay occurring and this can, dependent on market conditions, result in you losing money or even a potential sale.  This is particularly the case in a ‘forced sale’ situation or where the market value of properties is falling quickly has happened over recent years.

If you expect to extend your lease at some point in the future, the sooner the better.

A property with a lease of less than 70 years will be harder to sell. Many potential buyers will not wish to incur the costs and uncertainties associated with extending your lease. And mortgage lenders are reluctant to fund properties with shorter leases, especially those with less than about 70 years unexpired.

It may make financial sense to extend your lease as soon as possible, as an extension will cost more when the lease length falls below 80 years in any event.  This is because lease extension legislation has two different formulas for calculating the price to be paid.  A comparatively simple formula applies if the lease still has over 80 years unexpired and may have less impact on value due to there being longer until expiry and as such a lesser effect on the Market Value. However once the lease falls below 80 years, a the formula becomes more aggressive and includes an element of marriage value that has to be applied and as such the cost of extension becomes higher.

COMPARISON OF BEFORE AND AFTER

As a simple test you can compare the valuation of the lease extension before and after say 80 years.  There’s various ways to do this, but using the calculators available online can be a very good starting point, an example of such a tool is available here:  http://www.lease-advice.org.uk/calculator/  You should, however, always obtain the advice of a suitably qualified and experienced Chartered Surveyor and preferably someone who is also a Registered Valuer.

WHO IS AFFECTED?

A large number of flats built in the 1960’s, 70’s through to the 90’s were sold on leases of 99 years or even less which was quite normal in those days.  As such the likelihood is that the leaseholder is now within the 80 years and as such the cost of extension is increasing all the time.

Act now if your lease has less than 80 years unexpired!

KNOW YOUR RIGHTS

To extend your lease you will have to satisfy two criteria, i.e. You need to have owned the property for in excess of 2 years and the original lease terms needs to have originally been longer than 21 years.  There are, in some circumstances, the opportunity for a Vendor to being the claim and then transfer that to you a buyer for your to continue rather than waiting for 2 years from the date of purchase.  However if you are buying a short lease, you should make sure of your rights, liabilities and/or responsibilities in that respect before entering into legal commitment to purchase or expending significant monies.

The law states that you are entitled to a 90-year lease extension in addition to your current term, i.e. 10 years unexpired becomes 100 years, etc..  Furthermore the ground rent you pay may also be reduced to NIL.

HOW TO EXTEND

The process of extending the lease can take some time, with timescales of 6-12 months being usual.  You should begin by asking a specialist valuation surveyor to estimate the cost of extending the lease, ensuring you’ve factored in their fees to your calculations.

Following the valuation exercise you should instruct  a suitably qualified Solicitor to serve a Statutory Notice on the Freeholder, such notice setting out the amount you are willing to pay for the lease extension and giving a day by which the other party must respond by way of a counter-notice.  Remember you may be able to agree a deal directly with your Landlord through informal negotiation, potentially saving legal fees, but you should ensure that the legal formalities are completed correctly by a suitably qualified Solicitor and remember, a savvy Landlord may well drag out negotiations so as to increase the Marriage Value.  Therefore the sensible approach is to adopt the formal process.

Remember, as a leaseholder, you have to pay the freeholder’s valuation and legal costs, as well as your own and this can significantly increase the amount of money  you have to find to fund the transaction, so be sure to consider this aspect carefully in advance of entering into the process to ensure you have sufficient funds available.

Once the counter-notice is received from the Freeholder, you should check with your valuation surveyor that the freeholder’s cost of extension is considered reasonable. If there’s a dispute, your valuation surveyor will negotiate on your behalf. If no compromise with the freeholder is reached, the dispute is resolved at a tribunal and this can increase delay and again costs (particularly important if you are picking up both parties costs).