2. Determining The Cost Of Extending
A Lease
When determining the cost of extending a lease,
valuers take into account the ground rent income.
Usually a nominal amount, and the reduction in the
investment value of the freeholder’s interest.
When a lease is shorter than 80 years, the cost also
includes 50 per cent of the “marriage value”, the
amount by which the value of the property will increase
once the lease has been extended.
3. Investment and Marriage Value
Since both the investment value and the marriage value
of the property are linked to its price, the state of the
housing market has a significant impact on the cost of
enfranchisement.
In a rising market, it pays to extend a short lease early:
1. because the cost of extension is linked to the price of
the property,
2.because the shorter the lease, the more expensive it is
to extend.
4. Falling Markets
In a falling market, there is less incentive to
enfranchise because the value of the asset is
diminishing. However, once the market turns,
the cost of enfranchisement will rise more
steeply than house prices.
5. The Leasehold System
The leasehold system, which arises from laws
dating to the Middle Ages, means that when you
buy a flat in England and Wales, you are not
purchasing the property outright.
Only the right to live in that property for a
specified period. Most leases last for between 99
and 125 years.
6. Leaseholder Rights
In most cases, leaseholders have a right to
purchase an extension to their lease, although
there are exceptions.
If the majority of the leaseholders in a building
have already applied to purchase the freehold,
for example, a lease extension will not be
possible, neither will it be possible if the term of
the original lease was less than 21 years. Such
properties are rare.
7. Investment Buyers
If a property has a lease with less than 40 years, it is
difficult to get a mortgage, as lenders are increasingly
reluctant to offer loans to properties that do not meet
standard criteria.
Some investment buyers specialise in purchasing short-
lease properties, particularly in prime Central London.
Short-lease properties are sold at considerable
discounts: as a general rule, a property with a 25-year
lease could sell for as little as 50 per cent of the
freehold value, while a property with 50 years on the
lease might cost 70-75 per cent of freehold value.
8. Short Lease Properties
There are many reasons to purchase a property with a
short lease – some purchasers like the “buy now, pay
later” concept – but one of the main reasons is
speculation.
Investment buyers will try to purchase a property with a
short lease in the hope of enfranchising at a reasonable
cost and selling for a profit but buyers need to beware
of carelessly extended leases. Even a small increase in
ground rent can have a big impact on the price you will
pay a freeholder if you want to buy the freehold lease
later.
9. Making A Profit
Buyers should be wary as the chance of making
a profit is reduced when property prices are flat
or rising slowly.
Most buyers are very suspicious about being
encumbered with a short lease. Buyers are
concerned about being able to get out of their
property investment in a hurry should they need
to, and a short lease is a barrier to that.
10. For Any Help..
If you require any help with leasehold matters or
property transactions visit the Kelly and Co
website at www.kellyand.co.uk
