The majority of people are familiar with the fundamental differences between owning a house and owning a flat; in particular with reference to the increased obligations placed on them with the latter. There is likely to be a monthly service charge payable if the block has communal areas as well as a yearly ground rent figure payable to the Freeholder. Both of these arguably affect the marketability and value of the property but the most significant factor is the length of the flat’s lease.
So what you will want to know, as either a potential purchaser or current leaseholder, is what does this mean to me? To translate these figures into value we have The Leasehold Reform, Housing and Urban Development Act 1993 (the Act) which sets out, amongst other things, the criteria for who can extend their lease and the valuation framework for doing so.
To qualify in the first instance you must have owned a long lease for the past two years. A long lease is defined as:
- a lease of a term of years absolute in excess of 21 years when originally granted
- a shorter lease which contains a clause providing a right of perpetual renewal
- a lease terminable on death or marriage or an unknown date
- a leaseholder having held over at the expiry of a long lease, and the landlord has not served a notice terminating the tenancy
- a shared ownership lease where the leaseholder’s share is 100%
In reality it is often only the two year ownership rule that will determine whether or not you can extend, so the next stage is to get in contact with an established lease extension surveyor to calculate the cost of doing so. It is worth noting that, under the Act, the leaseholder actually acquires a new longer lease as opposed to extending the existing one.
Under the Act the new lease will be for:-
- A term expiring 90 years after the termination date of the original lease.
- At a ‘peppercorn’ rent (i.e. zero rent).
- The remaining lease provisions will generally be the same as the original lease.
The first element of the calculation arises from the fact that under the new lease the leaseholder will pay no ground rent. Take an example of a 99 year lease granted in 1990; as of today the Freeholder is entitled to receive a yearly ground rent for the next 77 years so the methodology here is ‘what is the value today of the right to receive x amount of ground rent for the next 77 years?’
The second element is based on the theory that in 77 years time the leasehold interest will expire and return to the Freeholder. The Act itself is fundamental that at no point is the concept of inflation or an increase in property prices applied but the right to receive a property worth, say, £300,000 in 77 years time is still a valuable asset.
There is one final calculation which I have intentionally saved until last as it often forms the majority of the compensation payable but also establishes the main precedent for extending in the first instance; marriage value.
Ultimately a property with a long lease is more valuable than one with a short lease. We talk of properties having short leases when they drop under the 80 year mark as this is the point at which marriage value kicks in. Take our example property with a 77 year lease, it may be worth only 90% of its value in contrast to having its new lease of 77 years plus an additional 90 (167 years in total). The Act states that when a lease drops below 80 years, the uplift in value of the aggregate of the leaseholder’s and freeholder’s assets is shared equally between the leaseholder and the Freeholder.
This emphasizes not only the importance of acquiring a new lease before the current one drops below 80 years, but also the fact that once you are below 80 years the marriage value figure accelerates year on year. If you can imagine the differential in values plotted on a graph, the line would start out quite shallow, decrease slightly at 79, 78, 77 years etc, but fall at a much more rapid rate once the lease length is in the 60s, 50s, 40s etc. As such it is recommended that whether you currently own a property with a short lease, or are considering purchasing one, you should speak to an experienced leasehold valuation surveyor who can advise you on the likely cost and how to best proceed.
