Nightmare Situation

Tapweasel

Hi,
was wondering if anybody might be able to help, I am at the end of my tether and really can't see a way out of my predicament.

I bought my property at the end of 2005 with a Northern Rock Mortgage and have since moved out and live with my partner and children in another property and have for the past 4 years been renting the property out at a loss whilst waiting for the market to recover.

I am now out of work for the past two months and am not too optimistic about finding anything soon. So have decided to get rid of the property, the problem is the lease is at 65 years and after contacting the freeholder in order to get an extension agreed I have been issued with a section 5 D notice offering me first refusal to buy the freehold for the entire property (mine is a 2 bed maisonette above a 1 bed flat) for £20000.

The mortgage has £161000 remaining,
the Lease has 65 years remaining,
Monthly Payments are £947
Monthly rental income is circa £850
A similar property is sold STC on the same street with an asking price of £169,000

I realise I have been extremely naive in these matters, but when I first bought the property I received a letter that had been sent to the previous occupants pricing an extension at £15 per year which at the time was £405 and had (stupidly) assumed the freeholder would price accordingly.

Please if anybody has any advice, could you let me know. I really am desperate.

Many Thanks

HappyMJ

You are buying the freehold which means a lot more than a leasehold extension. Speak to a property expert.

Tapweasel

Sorry, should have been clearer - I have no interest in buying the freehold. I don't have £20000 and I just want to extendthe lease to get rid of the property - it has been a millstone around my neck for 5 years now and with the loss of my job I have been relying on handouts just to keep up the repayments.

holly_hobby

Hi there,

If you have resided in the property for more than 2 yrs and as there is more than 21 yrs remaining on the lease, you are permitted by statue to extend it by another 90 yrs (or by a differering period by the freeholders agreement).

The problem in your case may be the cost of the lease extension, as where the remaining term is less than 80 yrs, it can become a much more costly exercise - and I think you can all but forget the £405 figure you mention in your post.

This is because the basis for calculating the fee for the lease extension becomes weighted in favour of the freeholder, due to compensating them for the lateness in the extension and delay in the somewhat imminent return of the property. Plus the fact that you will also have to pay the freeholder half of the increase in the lease value resulting from the applied extension.

This increase to the lease value as a result of the extension, is technically referred to as the "marriage value".

As your lease has less than 80 yrs to run, the cost of extending it will be linked to the value of properties in the area (unless your freeholder is willing to forgo the standard format, and negotiate a figure for pch), and will follow market movements .. i.e when property values dip, so will the cost of the extension, and thereby any increase will also result in an increased pch price from the freeholder.

The method for calculating a leasehold extension premium is complicated, but loosely based on local property prices/predictions of future investment returns, which are then applied to determine the sum of compensation the freeholder is due, in rexpect of the delayed reversal of the property (arising from the lease extension).

Processing fees - well you will generally be responsible for settling your freeholder's legal fees (but they may agree to pay their own, or contribute), PLUS of course your own legal and surveyors costings (which will be circa £4k (depending upon where you/conveyencer, are located in the UK), and your lenders fees.

So you may find that delay has resulted in this being a very expensive excercise, but leaving the lease as it is, will mean that you are really restricted to cash buyers (as the residual lease is too short for a typical 25 yr mge term). Of course although your sale price may be lower for a cash buyer, they may apply directly for the lease extension as part of the purchase/sale process.

You need to speak to your freeholder and see if you can on a one to one, negotiate a fair price that hopefully you can afford !

If he refuses to negotiate and wants to rely upon the standard calc process, the longer you leave it the more expensive it will become, due to the constantly reducing residual term.

Hope this helps

Holly

Tapweasel

Hi Holly,

Many Thanks for that, I was prepared (mentally at least) to take a slight hit in renewing the lease and then selling the property, but the combination of all of the points you have raised and the stagnant property market (as I understand it) are pointing to a massive shortfall.

If I speak to the freeholder about the possibility of extending is he under any obligation to delay the sale of the freehold (I have 8 weeks before it can be sold elsewhere)?

holly_hobby

Well it would be in his interests to do so, as whilst he remains the freeholder, its to him, whom the fee for extending the lease will be paid.

Obv if he sells it, it will be the new freeholder to whom you will negotiate/pch the extension from.

I can give you a ballpark (just for a guide ) figure for the extention, if you can provide details of the following:-

Could you advise what your ground rent is ?
What is the value of the property, with the CURRENT lease ?
What date would you anticipate extending the lease ?

Can I assume you have consent to let from you lender ?

H

Tapweasel

OK, well I suppose I ought to speak to the current freeholder like you suggested earlier, find out if he is open to negotiating a deal.

I'm assuming though the freehold is a more attractive proposition to a potential investor with the short lease? The other leaseholder is a very elderly man, also with 65 years left. Would it simply be a question of compensating for any loss he is likely to suffer the value of the freehold be extending my lease?

The ground rent is currently £10 per year
The value with the current lease, hard to say the estate agents I have spoken to are reticent to market it with the lease as it stands but I would think £150000
I would be looking to extend the lease as soon as possible as I just want to get the property sold.

I have had consent to let previously but it needs to be renewed every year.

Thanks again for your help / advice

holly_hobby

Hi there,

Ok, your lease (assuming this commenced as a 99 yr term) started in 1980 - the ballpark cost for extending (inc marriage value) will be circa 10/11k & costs - the high fee partly being due to the lateness of extension as discussed above. Of course the freeholder may not be aware of this formula open to him, and/or simply be happy to negotiate a lesser sum.

If you currently do not have consent to let (your previous permission having expired) - it is imperative that you renew/obtain this - as if you are letting outside of the lenders tacit agreement, you are in breach of your mortgage t&cs, which can result in their demand for immediate redemption of the borrowings. If you are also operating standard blds insurance (ie not landlord provison), the policy is also invalidated, which is a further breach of your mge T&Cs, being to maintain blds insurance for the duration of the term.

Furthermore, you should be submitting an annual self assessment declartion of the rental income, regardless of whether you are actually gaining financially from the arrangement - which I assume you have already been completing and submitting to HMRC over the yrs.

Have you explored marketing this to cash buyers via local agents, which may mitigate the lease issues from your side. (they negotiating directly with the f/holder). Negotiating a repayment plan with your lender regarding any shortfall realised at redemption ?

May be worth considering in the circs.

Hope this helps

Holly