A lease is a finite term. At a certain point in the lease the property subject to it, begins to lose value, notwithstanding market forces. Typically lenders require a lease to have an unexpired term of more than 80 years in order to offer a mortgage. Under the Leasehold Reform, Housing and Urban Development Act of 1993 (as amended) all leaseholders of residential property (with minor exceptions) are entitled to either extend their leases by a further 90 years or collectively purchase the freehold, subject to certain qualifying criteria.
There are 2 routes that can be chosen to extend/enfranchise. The first is by negotiation with the freeholder and the second is the formal route via the 1993 Act. If the first route is chosen then leaseholders are advised to obtain a market value of the extension/enfranchisement in order to be able to negotiate with the freeholder with some confidence and authority. With the formal route a valuation is also required which the leaseholders have to pay for, as well as the landlords reasonable legal costs.
The leaseholder is in effect, when purchasing an extended term or the freehold having to compensate the landlord for the diminution of value and loss of income, such as ground rent. A formula determined by case law (specifically Earl of Cadogan V Sportelli case) allows for “the annual discount applied, on a compound basis, to an anticipated future receipt (assessed at current prices) to arrive at its market value at an earlier date”. This rate was put forward at 5% for flats and 4.75% for houses.
If however the lease has less than 80 years unexpired there is an addition to the premium to be paid in that extending the lease below 80 years adds ‘more value’ to the new lease than would otherwise have been the case if the lease had more than 80 years unexpired. This is termed as marriage value
and the leaseholder has to pay 50% of this value.
In this very complicated and constantly evolving area it is important to understand how it works and how best to approach getting value for money in the extension/enfranchisement process. A surveyor with proven experience is able to assist in arriving at best and worst case scenarios for premiums to be paid.
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