Some Good News for Long Leaseholders?

By Alastair Hargreaves head of the Moving Home team at south west law firm Foot Anstey

It is said that every cloud has a silver lining. For certain long leaseholders, this is indeed the case as falling property market values represent a real money saving opportunity.

Anyone with a long lease, with less than 80 years left to run,should consider making an application to their landlord to extend the length of the remaining lease term.

Leases are an ever diminishing asset, since unlike freeholds the interest eventually reverts back to the landlord. As time passes, the value of the leasehold interest gradually erodes away, and becomes less attractive to both purchasers and lenders.

By extending the lease term, the reduction in value is minimised, and the interest becomes more economically viable. Most lenders look for a minimum unexpired lease term of two and a half times the loan period, so for example a 25 year mortgage would need no less than a 63 year lease term to be acceptable security. With mortgages ever harder to come by, a longer lease may be more preferable to lenders.

The law surrounding lease extensions is particularly complex and governed by several statutes. In simple terms, an application for a lease extension can be made by somebody who has owned the property for two years or more, and the lease term must be for more than 21 years. A successful application leads to a 90 year extension, in addition to the unexpired lease term.

If an application is made to the landlord when there is less than 80 years left to run on the lease, then a “marriage value” is paid to the landlord. This marriage value is based on an advanced formula which determines the price of the leasehold property partly by reference to current market conditions. A suitably qualified valuer should be involved.

Clearly, in a buoyant market the marriage value may be significantly higher than in the current climate, when the sum is likely be reduced. Therein lies the money saving opportunity, and an objective incentive to act quickly.

Published 24/02/2009. The author of this article is Alastair Hargreaves