The lease is of a predetermined length and will eventually expire. When it runs out, the freeholder can take back the keys of the property. In reality, this day seldom comes because circumstances will force the owner to do something about the diminishing lease. But theoretically the property will revert to the ownership of the freeholder, who is sometimes called the ‘reversioner’ as a result.
But there are no two ways about it, the leasehold flat or leasehold house is a wasting asset as a result of the shortening lease. The closer the lease gets to zero years unexpired, the more it reduces the value of the property. Of course, in a rising market, this is more than outweighed much of the time by the appreciation in the value of the property. In a static property market, a diminishing lease will gradually reduce the value of the property, all other things remaining equal.
Leaseholders can extend their leases using a Section 42 notice. Once stipulation is that the lessee must have owned the flat for two years (unlike a Section 13 notice for purchasing the freehold, when lessees can participate from day one of ownership). When successful, they will have the right to an extension of 90 years to the current term and ground rent effectively reduced to zero.
Sometimes it is possible to negotiate informally with the freeholder to extend the lease. They may agree to a smaller lump sum, an increase in the ground rent, but a shorter extension. Owners should be careful about making sure the agreed terms represent good value compared with the standard benefits of the Section 42 notice.
One major landmark affects the value of the lease. It is a concept called marriage value. Without explaining this in detail, this kicks in when the lease has 80 years or left remaining. This can be an expensive component, and any flat owner with a lease length of 80 to 85 years is well advised to act decisively to save a significant sum before the lease length drops below 80 years.
Another major factor to consider is that lenders are increasingly demanding that leases on flats be longer than 75 years. There is a large variation and some are more lenient, accepting leases down to 65 years. Put simply, leases shorter than 75 years limit the number of banks that will lend money. That means the flat owner may pay more for their mortgage – if they can get one at all – and potential buyers will increasingly be deterred by short leases.
So doing nothing is not an option if a lease is coming close to 80 years. And the longer you wait, the more it costs. And the increase in price past 80 years is steep. So contact an ALEP member now to find out your options.
