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In basic terms, a lease is a contract between two people. Leases are legally enforceable agreements that generate an ownership interest in real property between a landlord and a tenant. Unlike a freehold property, it also establishes an interest in a property for a set length of time, usually in exchange for rent or a premium.

Your rights and obligations as a lessee, as well as those of your landlord, will be outlined in the lease. With this contract, you are permitted to occupy and utilize your property for a set amount of time.

From there, the landlord reclaims possession of the property when your lease term expires. As per extending a lease, read on to discover everything you need to know.

Getting a Lease Extension

The procedure of extending the length of your lease and your tenancy before the landlord reclaims the property is known as a lease extension. This can be performed through direct negotiation with the landlord or by the service of a Section 42 Notice, which we recommend you have handled by a professional.

By now, you may ask yourself why you should extend your lease. Lease renewals with fewer than 80 years remaining can dramatically boost a property's value. If your lease is short, few mortgage lenders will lend against it, complicating the sale. Additionally, you may need to refinance a house with a fixed-term lease.

You should also note that the cost of extending a lease climbs in direct proportion to the length of the lease. Moreover, a lease of fewer than 80 years of property can potentially reach a marriage value, which implies the freeholder obtains half of the enhanced value from the extension.

Qualifying for a Renewed Lease

In requesting a lease extension, a lessee must meet specific requirements. First, you are eligible for the extension if you have held the property for two years. Second, you must ensure that the initial lease clearly states that its period goes beyond 21 years. Now, if you match the criterion mentioned above, you can discuss with your landlord about renewing the lease.

Leasehold Reform, Housing, and the Urban Development Act of 1993

Leaseholders who meet specific requirements may extend their lease for an extra 90 years for a nominal fee. When the current lease expires in 75 years, it can be replaced with a 165-year lease (90 plus 75), with no rent due throughout that time.

For the lease extension, the Landlord is entitled to a 'premium' (cash lump amount). Although the premium is negotiated, it is computed using a methodology outlined in the Leasehold Reform, Housing and Urban Development Act of 1993.

You have the following rights as a lessee:

  • Obtain the name and address of the freeholder

  • To assess insurance costs

  • To investigate the process used to calculate and spend service costs using receipts

  • A Section 20 consultation for anticipated work costs above £250 or surpass a term of 12 months

  • Pursue disputes regarding high expenses or poor workmanship to a tribunal

  • Jointly obtain the freehold of their property

Property Marriage Value

Property marriage value is about the increase in property value as a result of the lease extension. The landlord receives 50 per cent of the rent when a lease with a remaining term of fewer than 80 years is renewed.

For example, a property worth £125,000 on a 60-year lease and then worth £160,000 on a 150-year lease is worth £35,000. Due to this arrangement, the landlord is entitled to £17,500 or (50 per cent of the property’s value).

Leasing Over Selling

The remaining length of your lease and the urgency you need to sell determine whether you should extend it. For a clearer picture, check this guide below:

  • +90 years = Unjustifiable lease extension

  • 90-85 years = Potential for lease extension and saleability improvement

  • 85-80 years = Best term lease for a lease extension

To avoid complicating the selling of the property, new owners must know that they are not permitted to request an extension for another two years, after which the lease may be less than 80 years.

Understanding Mortgage-ability

In understanding a property’s mortgage-ability, there are things to consider. First, a term lease of fewer than 80 years may mean that there could be a dwindling number of lenders ready to make mortgages on properties.

Second, only a few lenders will lend, and the terms will be more stringent (i.e. lower loan to value and a higher rate). And third, a term lease of 60 years or below may make obtaining mortgages entirely impossible.

In regards to the third point, mortgage-ability influences marketability. Simply put, it will be challenging to sell your home if buyers cannot obtain a mortgage. Through this, your buyer pool will be confined to a small number of cash buyers and bargain seekers.

Buy a freehold Vs. Renewing Your lease

Leaseholders who meet specific criteria may extend their leases or join with other leaseholders to purchase the freehold under the Leasehold Reform Act of 1993.

If you disagree with the freeholder's administration of the property or the expensive charges (ground rent, insurance, service charges, and so on), being a freeholder offers you authority over these issues.

This solution requires coordination with your neighbours and meets the following requirements:

  • At least 50 per cent of leaseholders must want freehold ownership

  • You must both want the freehold in a two-flat block

  • Long-term lessees must account for two-thirds of all lessees (i.e. originally granted for more than 21 years)

This is an important decision because the freehold firm will need directors and managers. Before proceeding, get the advice of an experienced leasehold solicitor and an RICS Leasehold Reform valuation surveyor.

Conclusion

When it comes to big financial decisions such as committing to your property of interest, it would be best to seek professional advice. This way, you are guided as you learn. Perhaps renewing or extending your lease is a daunting task that you may or may not have to go through. Regardless, our key takeaways should be of valued knowledge to you.

For one, if your lease is more than 90 years old, it may not be worth extending unless you can save a large amount of money on ground rent or wish to stay for an extended period. Another point, if you are elderly and do not want to relocate, you may want to leave the issue of your lease expiration to your heirs.

Ascertain that you (and your family) are aware of the implications. Finally, deferring your lease extension until a solid plan for community enfranchisement may be more cost-effective and convenient. Furthermore, if leaseholders seek to purchase the freehold while your application is pending, your application may be suspended.

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