If you purchase a flat in the UK, it will likely be a leasehold property. Most flats are leasehold, while the majority of houses are freehold (although there are exceptions to this rule).
Under UK law, buyers of leasehold properties are essentially purchasing the right to live in the property for a certain period of time (the lease term). Even though you own the property, your landlord, or freeholder, still owns the building (your block of flats, for example) and land on which it stands. This means you’ll pay ‘ground rent’ to your freeholder to rent this land from them. When the lease comes to an end, ownership of the property will return to the freeholder.
People who own a leasehold property (otherwise known as leaseholders) have the legal right to extend their lease if they have owned their home for at least two years. There are two ‘routes’ to lease extension – the informal route and the formal (or statutory) route.
Under the formal route, leaseholders can extend their existing lease term by 90 years, which also has the effect of reducing their ground rent to a ‘peppercorn’ – i.e., nothing.
Unfortunately, there is a cost to extending your lease. You will have to pay your landlord a ‘premium’, the exact amount of which will depend on the length of your remaining lease term, the value of your property and, ultimately, what your landlord is willing to accept. Under current legislation, you will also have to pay your landlord’s ‘reasonable’ legal costs.
The ‘80-year rule’
You might be thinking that you can wait until there are only a few years left on your lease before you begin the process of lease extension. Unfortunately, that isn’t the case.
In fact, it is unwise to let your remaining lease term drop below 80 years – doing so can lead to significant extra expense when trying to extend your lease, reduce the value of your property or even render it unsellable. This is because most mortgage lenders will not offer finance against flats with fewer than 80 years remaining on the lease, or if they do it will be at very unfavourable interest rates.
If you extend a lease below 80 years in length, you will also be subject to the ‘marriage value’ – a sum due to your freeholder of 50% of the increase in the value of your property after the lease has been extended. So, if the value of your property increases by £15,000 following your lease extension, you will owe your freeholder £7,500 – and that’s on top of the premium you’ve paid, your own legal costs and your freeholder’s legal costs.
For many years, campaigners have argued that the current leasehold system is archaic and favours freeholders at the expense of leaseholders’ legal rights and security.
On 21 December 2017, the government announced its plans to address growing concerns surrounding the leasehold system. On 11 January 2021, then-Secretary of State Robert Jenrick announced that the issues would be addressed via two separate pieces of legislation.
The Leasehold Reform (Ground Rent) Act 2022 took effect in July 2022 and had the effect of reducing ground rents to zero on all new leases. Unfortunately, leases that were already in existence when the Act came into force remain unaffected.
The second piece of legislation will address other problematic areas of the leasehold system, including (but not limited to):
- Introducing a statutory process to calculate the cost of extending a lease or buying the freehold
- Abolishing the ‘marriage value’
- Introducing the right to extend a lease by 990 years
- Enabling leaseholders to buy out the ground rent on their property without having to extend their lease.
However, a set date for the introduction of this legislation has yet to be confirmed and the current system remains in place for now.
Leaseholders whose lease term is approaching 80 years might be tempted to delay until the new legislation has taken effect, but this could be a dangerous approach. We don’t know when the bill will be introduced into Parliament, nor how long it will take to receive assent. In the meantime, you could face significant financial penalties if you let your remaining lease term dip below 80 years. We would advise taking specialist legal advice before making such a decision.
How our leasehold enfranchisement specialists can help
At Attwaters Jameson Hill, we have been helping leaseholders across Hertfordshire and Essex with lease matters for many years. We understand that the complicated process of lease extension can feel very daunting, so we’re on hand with the expert advice and specialist local knowledge you need to complete the process successfully.
We’re also aware that the lease extension process is very expensive for leaseholders, so we’re completely transparent with our fees and work to keep costs down at all times. You’ll know what you’re paying for the outset, with no nasty surprises or hidden costs down the line.
We can help with:
- Advice on how to proceed with a lease extension
- Negotiating with your freeholder to get the process underway
- Getting your lease valued by a professional surveyor
- Agreeing the lease and completing all matters so that we can then register the new lease at the land registry.
We also advise and assist clients who wish to purchase the freehold of their building together with their fellow tenants. This is called ‘collective enfranchisement’, and it means that you will own your property outright and will no longer have to pay ground rent or service charges to your freeholder.
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