Why The Length Of A Remaining Lease Term Is Important
Term of the Lease
When buying a leasehold property, it is important to consider the length of the remaining term. As time goes by the value of the property is affected by the diminishing term and makes the property more difficult to sell.
With a third-party landlord, a tenant has a statutory right to extend the term of their lease by 90 years in addition to the original term at a nil ground rent and in return for a premium payable to the landlord. This right which was originally granted to the holders of long leases of houses now includes the holders of long leases of flats and apartments.
The law lays down a procedure whereby tenants can exercise their legal rights to have the lease extended. If the landlord and tenant cannot agree the premium payable, then ultimately the matter may be taken before a separate body called the Leasehold Valuation Tribunal who will set the value. The valuation of the premium to be payable to the landlord is an extremely complex issue and care needs to be taken in choosing a surveyor who is practised in this area of work. This then raises the question as to when a flat owner should consider extending the term of their lease.
Mortgage lenders currently have an inconsistent policy with regard to the length of time remaining on a lease which they will expect to see before they will consider lending monies against that lease. Most mortgage lenders will expect around 50 years to be remaining at the end of the mortgage term. This means that a 25 year mortgage term would require that there were at least 75 years remaining on the lease at the point of purchase.
There is no reason why a cash purchaser should behave any less carefully when spending their own money, and especially when they might sell to a party who needs a mortgage.
You should further consider whether you would buy a lease with only 65 years remaining. It is fairly clear therefore that a lease becomes less and less attractive as the length of the term remaining falls. Certainly below 60 or 55 years it may be seen as being unacceptable to a mortgage lender and equally unattractive to a cash buyer.
Extending before or after 80 years are remaining
There is also another issue which is the calculation of the sum to be payable to the landlord. The law provides for a different basis for calculation if the length of the lease term remaining falls below 80 years. There is an advantage therefore to a tenant in extending their lease before the term falls below 80 years.
If the tenants are already the landlords or hold shares in a Management Company which owns the freehold, extending the term of the lease should be more straightforward as no premium would be payable; just the legal fees.
In addition to the above mentioned statutory right of an individual tenant, there is the question of Collective Enfranchisement which allows the tenants acting together and by a simple majority to exercise the right to demand the freehold to be transferred to what is known as a Purchase Vehicle (most usually a limited company, the shares of which are held by the tenants) which then leaves the tenants completely in control of their own repairs and maintenance etc. The tenants can then grant themselves extended leases whenever they wish and usually for no premium.
Need further guidance? Talk to Tollers. We have specialists at Tollers who can help you through this particularly complex area of property law.