What is a lease extension?
An unfortunate consequence of owning a long lease is the fact that its value will reduce over time as the lease gets shorter. Obtaining a lease extension is one of the main ways to get around this issue provided the leaseholder has owned the property for at least two years beforehand, as it will extend the leasehold by 90 years on top of its remaining leasehold, meaning that a 90-year lease will become a 180 year one.
A lease extension can be negotiated with the landlord, although this removes any fixed boundaries as to what can be negotiated, meaning that the landlord is free to seek change to any terms they want of the leasehold, which could result in them asking for higher prices over such matters as service charges. Alternatively, the leaseholder can instead follow a statutory procedure to extend their lease by serving a section 42 notice, which guarantees a 90-year extension if the leaseholder is able to afford its costs.
Best time to extend your leasehold
It is generally advisable to think about extending your lease before it reaches the 80-year mark and to avoid letting it fall below. Detailed below are the many factors that detail why the 80-year mark is so important in regards to leasehold extension.
Mortgage
Having a leasehold shorter than 80 years would make it much harder to obtain a mortgage for the property. This is because, some lenders require the lease to have a certain number of years left on it as a way to avoid giving out a mortgage to a higher risk property, and in leasehold terms many banks and lenders consider less than 80 years to be a short-term lease.
Payable marriage value
When a lease drops below 80 years the premium to extend the lease increases because its marriage value becomes payable to the landlord, marriage value being the increase in value of the property after the leasehold extension takes place. This results in the process of leasehold extension getting significantly more extensive the less years remain on the leasehold under the 80-year mark.
Sudden drop in property value
It might be best to extend the lease even before it gets close to the 80-year mark as its costs will begin to plummet by a matter of hundreds if not thousands of pounds the lower it gets. That is why the general safe zone for lease extension is commonly regarded to be 90+ years as the cost of the extension will provide minimal value increase for the property should it be completed at that point. Though it should be noted that extending the leasehold while its higher than 90 years does at least carry the benefit or getting rid of ground rent.
Lower buyer attraction
It should also be taken into account that the less years the leasehold has on it the harder it will be to find a buyer should the property go on sale. Which acts as another incentive to try and get a leasehold extension once it drops below 90 years as it will increase the value of the property if you are looking to sell as well as make in more attractive on the open market.
Time considerations for the lease extension process
If the leasehold is approaching the 80-year mark it is best not to wait and get the extension as soon as you can, as the leasehold extension process can take up anywhere from 4 to 12 months on average to complete, which could result in a mass drop of property value and rise of extension costs if you were to leave it last minute, since the consequences of going below 80 years will take effect from day one.
