If you decide to add a flat to your portfolio, it will be a leasehold
property and this will mean a further layer of complications that you need
to be aware of. If you own any flats already, now is an excellent time to
enhance them by correcting lease length and management. However, do
beware, since although the law entitles you to address the many
shortcomings, the process is complex and even catches out many involved in
the field.

For those considering buying flats:
Issues relating to the leasehold of flats can have a huge bearing on the
value and market marketability of a flat. Here are some things to
consider:

1. What is the freeholder like? Many flat owners discover too late that
they have bought a property where the freeholder is managing the property
badly and levying excessive service charges and offering overpriced lease
extensions. The best way to get to the bottom of this is to ring on the
doorbells of neighbouring flats, but make sure that you are speaking to
the owner and not just a tenant! If it turns out the freeholder is a
monster, check that you can buy them out. If not, walk away!

2. Do not buy a flat with a lease with less than 85 years remaining
without raising the issue of lease extension of freehold acquisition. The
lease length is bound to become an issue during your ownership, so it is
better tackled head on.

3. Check the shortest lease your mortgage lender will allow. Usually this
is around 70 years, others will accept down to 65 years. If the current
lease length of the property you are considering is close to this limit,
you can use this as a bargaining chip with the seller.

4. If the lease is short (ie less than 70 years) and you are willing to
accept the costs or negotiate the costs with the seller, you may need to
get the seller to begin the lease extension process BEFORE you buy. You
need to have owned a flat for two years before you can serve a Section 42
Notice, as it is called. And this notice will compel the freeholder to
extend the lease, whether they want to or not. In any case, the current
owner is usually in a stronger bargaining position with the freeholder
than a purchaser would be. However, never forget that the lease length is
the seller’s problem, not the buyer’s. If they cannot sort it out, go and
buy another flat without a short lease problem.

5. 80 years is a significant number: when the unexpired term of a lease
drops below this level then you begin paying an additional element called
marriage value if buy your share of freehold or extend the lease. Seek
legal advice if the lease on your chosen property is between 81 and 85
years unexpired.

6. What is the managing agent like? How high are the service charges? If
they are bad, you may be able to exercise you rights to get rid of the
managing agent after you have bought. So check with your solicitor and you
may be able to use this as a bargaining point.

7. Don’t take the word of estate agents on the subject of lease values or
the benefits of shares of freehold in a block of flats. Most have no idea
of the values and implications. Better to speak to a surveyor or solicitor
if you are unsure. For just �4 you can download the leasehold title from
the Land Registry website (www.landregisteronline.gov.uk), which will show
you the exact lease length without having to take anyone else’s word for
it.

8. Estate agents may not be sure why a long lease or share of freehold is
a good thing. But one thing you can be sure of is that they mention it in
the particulars of properties, so clearly it does add some value.

9. Long leasehold or share of freehold is well worth having. Whether or
not you want to pay more for a flat with it compared to one that does is
up for discussion. However, the grief and aggravations of buying share of
freehold or extending your lease is taken care of.

10. If you are buying a flat that has already bought its share of
freehold, find out if there were some flats in the block that did not buy
into the scheme plus have not extended their leases. There could be hidden
value in there! If the �non-participants� have a short lease, then
eventually they must come to the freehold company to extend. If you are a
shareholder, you share in the potential windfall. We are talking �5,000
- �30,000 to be shared among the freehold company participants at some
point so you may be able to factor that into your haggling. The seller
will not usually be entitled to take this benefit with them.

For those with flats already:

How does lease length affect the value of a flat?
Do check your lease length and consider taking action since, if a lease
length falls below 80 years (or even worse, if it falls below 70 years),
it is usually difficult to sell the flat for the best possible price. It
is likely that an incoming buyer will be advised by their solicitor to
demand a lease extension before purchasing the flat.

Furthermore, many mortgage lenders will not lend against a property with
so short a lease. Even if you are not currently planning on selling or
remortgaging your flat, taking pre-emptive action now will make the flat
�ready to go� for the future, allowing you to avoid encountering
problems if you ever do want to sell or remortgage. Waiting to extend the
lease until when you come to sell causes delays, so your buyer may
withdraw.

Correcting the length of a lease becomes increasingly more expensive with
every year that it is left unattended. Most incoming buyers will insist
upon a lease extension so as to avoid paying higher costs later
themselves. If you wait until you are selling before extending your lease,
you will pay far more than if you act now.

Which to choose: lease extensions or freehold acquisition?
If the main issue is the lease length, a lease extension is usually
sufficient. It is often a far cheaper and quicker process than acquiring
the freehold. Furthermore, if less than 50% of flat owners are interested
in purchasing the freehold, then pursuing individual lease extensions may
be the only option.

However, if flat owners are experiencing significant problems with their
freeholder (such as excessive maintenance charges or a failure to manage
the building satisfactorily), then freehold acquisition may be a
preferable alternative. Leasehold Solutions can advise flat owners on a
case-by-case basis.

How much does extending my lease or acquiring the freehold cost?
The valuation to calculate the cost of a lease extension or freehold
acquisition is based on three factors tied into a flat, which are worked
out by a complex set of calculations:

1. Ground Rent: For most leasehold flats, ground rent is payable to the
freeholder. When the lease is extended or the freehold is purchased, this
ground rent is cancelled. The freeholder must be compensated for this loss
of income. Typically, the amount payable is 15-20 times the current annual
ground rent figure, as a lump sum.

2. Reversion: After a lease has expired, the flat usually returns to the
vacant possession of the freeholder. When the leases are extended or the
freehold is sold, the freeholder either has to wait longer to get the
property back or will never get it back and again must be compensated for
this loss of capital.

3. Marriage Value: When a flat�s lease is extended or the freehold is
purchased, the market value of the flat increases. When a lease length
falls below 80 years, the freeholder is entitled to 50% of this increase
in value (less 1. and 2. above), to be paid up front as part of the
premium. This is only payable on flats where the lease has fallen below 80
years.

Fees are in addition to the lease extension or freehold acquisition
�premium�, and by law flat owners must also pay for the freeholder�s
legal and valuation fees.

The total cost can range from a few hundred to a few hundred thousands,
depending mainly on the current value and lease length. It is important
that you use a surveyor/valuer that knows what they are doing to calculate
this cost for you, ideally one that is a member of ALEP (www.alep.org.uk).

Whatever the cost involved for individual flat owners, most mortgage
providers are happy to add the cost to a mortgage, since a lease extension
or share of freehold increases the lender�s security and usually adds
value to the property by at least the cost of the exercise, sometimes by
considerably more, especially when leases are particularly short (e.g. 60
years or below).

When is the cheapest time to extend my lease or buy the freehold?
The answer to this question is nearly always �now�. If a lease length
is above 80 years, the �Marriage Value� element does not have to be
paid. It is therefore strongly advisable to act before the critical
80-year mark.

If your lease has fallen below 80 years, the cost of extending will
increase steeply with every year that the lease length is left unattended.
Acting sooner rather than later is crucial where lease length is
concerned.

Alex Greenslade -
Leasehold Solutions
Alex is Managing Director of Leasehold Solutions, the longest established
company of its kind that enables flat owners to extend their leases and
acquire their freeholds. He is also the Honorary Secretary of ALEP, the
Association of Leasehold Enfranchisement Practitioners, which promotes
best practice in leasehold matters.

www.leaseholdsolutions.com
www.alep.org.uk