Monday, 17 September 2012

PROPERTY ARTICLE: Lease extensions. Copyright SvD.

Lease extensions

I’ve been asked recently by an investor to find him properties with short leases so he can snap them up at a cheap price, buy the freehold or extend the lease and sell the properties on at a profit.

Not so easy!

Given that the London property market seems to be bereft of ‘good deals’, i.e. there are very few, if any, properties available at knock-down bargain prices as the trend in London property has been to appreciate consistently despite the recession.

Investors are beginning to find short lease properties enticing but I would add a very big word of caution. Beware! Do get advice from a solicitor or surveyor in this area- known as enfranchisement (the purchase of the freehold). It is not guaranteed by any means that a freeholder will automatically part with his ownership of the freehold just because the leaseholder demands to buy it. The freeholder will more likely agree to an extension but on the basis that the leaseholder has owned the property for two years. (Under the Leasehold Reform Housing and Urban Development Act 1993, subject to owning the flat for two years, the leaseholder can force the landlord to extend the lease.)

Buyers should be aware that most leases on new build properties are 999 years and on most other leasehold properties, the term is 99 years. As time goes by and the lease becomes shorter, mortgage lenders will most likely hesitate or decline altogether to lend against a lease of less than 60 years. Hence one of the reasons that short lease properties are lesser in value – anyone who will require a mortgage may not be able to buy one.

However and again under the Leasehold Reform Housing and Urban Development Act 1993, the leaseholder is entitled to request an extension of the lease by the amount remaining on the lease plus ninety years. So say, 60 years remain, add another 90 and the extension will be for 150 years.

However the process of extending the lease can take several months and in some instances, more than a year. Be aware that the process is not swift. Also buyers should consider the cost of the extension and parting with a large sum of money which they are effectively sinking into the property. Investors considering ‘flipping’ (i.e buying to sell on at a profit immediately upon exchange) would be wise to calculate their profit margin accurately, if the cost of the extension is significantly high. I should add that even though the benefit of a lease extension can be transferred to a new buyer (by serving the landlord formal notice), in practice this is not always straightforward.

On the subject of purchasing the freehold – enfranchisement- the process is even more complicated. The main obstacle to enfranchisement is often the cost- the valuation process takes time (again a year or more is not uncommon). In order to calculate the cost of the freehold, the value of the land (today’s value) is calculated against the rent the freeholder could receive forever. A ground rent is usually levied on the leaseholder so if the owner of the freehold were to sell, he would need to know the value of the loss of the rent he would have received. I think you get the idea of how complicated the process can become!

Again there are many considerations when extending a lease or purchasing the freehold. It is absolutely imperative that prospective buyers obtain accurate and reliable advice for either a surveyor or solicitor who will be able to save buyers from unrealistic expectations in this domain.

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