Beware the menace of the expiring lease

Flat-owners who let the the terms of their leases fall below 80 years could find the costs of extensions are high. Chiara Cavaglieri says now is the best time to renew

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Leaseholders who bought a flat or house built in the 1970s and 1980s are being urged to look into extending the terms of their leases or risk facing spiralling costs. The Leasehold Advisory Service (Lease) has warned that many people face paying over the odds if they leave it too long to extend the term of their leases.

"Many flat-owners see this as an unnecessary expense that they can put off, but once the unexpired lease gets down below 80 years, the costs for renewal start to ramp up sharply. It may even get to the stage where some owners cannot afford to renew," warns Geneviève Mariner, a Lease board member and head of enfranchisement and leasehold reform at Strettons chartered surveyors.

The sooner an extension is sought, the cheaper it will be. For example, a lease extension of a £250,000 flat in London, with 81 years remaining on the lease, is likely to have a premium between £3,000 and £6,000, but to extend a lease for a property with closer to 65 years unexpired on the lease, the premium could jump to between £19,000 and £24,000.

Over time, as the end of the lease nears, leasehold properties tend to lose value (sometimes by as much as 10 or 20 per cent), as well as the premiums rising dramatically once the unexpired term of the lease gets below 80 years. This is partly because of what is known as "marriage value" – the measurement of the potential increase in the value of the house or flat once the lease extension has been granted. Legally, tenants with less than 80 years left on their lease must pay half of this marriage value as part of the compensation to the landlord.

The value of a leasehold property decreases in line with the length of the unexpired term, as they become more difficult to sell or remortgage. Even those with more than 80 years left on their leases should extend it as soon as possible.

"Now is the time to extend your leasehold, if you can afford it, and assuming you bought the leasehold after late 2007, because the marriage value is likely to be much less now that prices have been sliding for 18 months or so," says Nigel Lewis, a property expert at FindaProperty.com. "These marriage values used to be much higher because prices had risen so fast since the leasehold was first bought."

If you buy a leasehold property you do not own your home outright. A lease is a contract between yourself and the freeholder, the person or company that owns the land on which your home stands. By taking out a lease, you are buying the right to live in that property for a set period of time, typically between 99 and 125 years.

A lease will lay down the responsibilities of the property owner, such as service charges and ground rent, as well as the obligations of the freeholder, such as providing building insurance and rubbish collection. The most significant factors to watch out for are the length of the lease, the service charge costs and the insurance arrangements.

There are rules and regulations when it comes to extending a lease. First, you must have owned the property for at least two years. Usually the immediate landlord is the freeholder, so normally you would serve the notice for an extension on him. You are liable for the legal and valuation costs of the landlord so you should appoint a valuer and a solicitor. They can advise you on the offer made in the notice, help you to prepare information for the application and respond to any requests from the landlord.

"I have heard of flat-owners going for a DIY lease extension, but this is fraught with danger, and without professional advice they could end up paying far too much," says Richard Neeson, a partner at property consultancy Carter Jonas.

If accepted, the extension then adds 90 years to the unexpired term of your lease and the ground rent is reduced to nothing more than a nominal payment for the whole of the term. If the landlord disputes a claim or you cannot agree on the price, the matter can be referred to the Leasehold Valuation Tribunal (LVT), but this can be a lengthy and expensive process.

Absent landlords can be another potential obstacle but there are still options open to you. If, for example, the landlord is a company in receivership or bankruptcy, you can serve the notice on either the receiver or the trustee in bankruptcy. Both are bound by law to respond as they are acting as landlord. If the landlord simply cannot be found, you have to make an application to the County Court for what is known as a vesting order. The case will usually be referred to the LVT to work out the premium payable.

For a rough idea of how much it might cost to extend your lease there is a rudimentary calculator on the Lease website at www.lease-advice.org.

Another option is collective enfranchisement, in which you and other leaseholders work together to buy the freehold. The most important task is to organise your neighbours into supporting the cause because at least half of the flat-owners need to co-operate. If a sufficient number of leaseholders want to get involved, they can legally compel the landlord to hand over the freehold. As a group, you can serve a notice to buy the freehold in which an offer is made to the landlord and the process of negotiation begins. It's important to seek valuation advice. Before putting forward the initial notice, a nominee purchaser must be established to apply for the freehold and become the new landlord.

Setting up a formal agreement covering financial contributions and an agreement of terms between all the leaseholders will help to prevent the application falling through. As with lease extension applications leaseholders have to pay their own and the landlord's costs so it's worth getting a solicitor too, to help with preparing information for the action, setting up the company and amending the terms of the leases after enfranchisement.

"In most cases, the purchasing flat-owners set up a new company to represent them all. They all have equal shares in that company, but it's still important that they all extend their leases once the block has been enfranchised," adds Mr Neeson.

There are significant advantages to collective enfranchisement, namely that flat-owners have much more control over the management of the block.