It may seem like a long time, but is a 125 year lease long enough? Residential leasehold specialist Siobhan Dunsdon says it’s not. Here, she explains why.
Contact Siobhan on 01225 462871. Alternatively, you can email her or complete the Contact Form at the foot of this page.
It’s a pretty bold statement but, in short, a 125 year lease is not long enough. But let me explain.
What is leasehold?
There are two main ways to own property, freehold and leasehold. A third way, known as commonhold, remains extremely rare.
With freehold property, you permanently own the building and the land it stands on, but with leasehold property:
- you own some or all of the building – but only for a set number of years; and
- you don’t own the land it stands on.
The legal term for the parts of the flat you own is the “demised premises”, as defined in your lease. Typically, it includes the flat’s interior, including the wall surfaces, the ceiling above and the joists below. However, in most cases, the demised premises doesn’t include the structural, external walls and the roof, nor the common areas such as stairs, landings, communal garden etc.
A lease exists as a legal mechanism, linking all the flats in the building with the landlord (freeholder). That way, it’s possible to compel everyone to comply with the various rules and obligations in the lease. These include:
- paying service charges to fund the cost of managing and maintaining the building, insurance, lighting and cleaning communal areas etc.
- enforcing covenants, which are obligations to do or not do something. For example, a restrictive covenant in the lease may prohibit running a business from the property.
How long should a lease be when buying a flat?
A significant drawback to leases is their fixed term. So, when you sell your leasehold flat, the purchaser acquires the remaining years on the lease, known as the “lease term”. And when the lease term eventually expires, ownership reverts to the freeholder.
There is no set term for a lease, but in the past, many residential leases were for 99 years. However, most new leases are for at least 125 years and sometimes considerably longer. The main reason new leases are now longer is to improve mortgageability. Mortgage lenders refuse to lend on leasehold property if they consider the lease term too short. That’s likely to happen when your term drops below 90 years and possibly before that. A short lease significantly affects the value of your flat and your ability to remortgage or sell.
Statutory lease extension
But there is a legal escape route. Subject to you satisfying the qualifying criteria, the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”) gives you the right to acquire:
- a 90 year extension to your remaining lease term; and
- to extinguish the ground rent.
Extending your lease voluntarily without going down the statutory route is also possible.
Find out more about extending your lease.
Lease extension calculator
The remaining lease term is the most significant factor affecting the cost of a lease extension. So, the more years remaining, the less an extension costs. On average, a 90 year extension to a recently granted 125 year lease will cost you around £2,000 to £3,000. Expect that cost to double if the remaining lease term is closer to 80 years.
Check out the Leasehold Advisory Service’s lease extension calculator.
However, the cost of a lease extension increases substantially if the remaining lease term is less than 80 years. And that’s because ‘marriage value’ then forms part of the calculation.
Marriage value equates to 50% of the increase in the property’s market value arising from the lease extension. One way to look at it is you and your landlord sharing the financial benefit of extending your short lease. But often, marriage value amounts to tens of thousands of pounds. And, of course, that’s payable in addition to the basic cost of extending the lease.
Is 125 year lease long enough?
When buying a flat, future saleability should be a significant consideration. Of course, you are unlikely to have much to worry about if the original lease term was 999 or even 250 years. But with a lease granted for a term of 125 years, the property becomes difficult to sell or mortgage after only 35 or 40 years. That may sound like a long time, but every year you remain in ownership, the property becomes less attractive to a future purchaser.
Of course, you or your successor can extend the lease once under the Act. But the closer you or they get to 80 years, the more expensive the lease extension becomes, even without marriage value. So, even if you have most of the 125 year term remaining, consider exercising your right to extend at an early opportunity. Doing so provides certainty and reassurance to a future purchaser.