Is my lease extension considered onerous?

marvellouspotato

Hi! My current lease is at 88 years and I am in the process of extending. I have opted for the non-statuary (i.e. informal) route with the freeholder (Clarion Housing) offering a 'standard' 125 year lease with a ground rent of £100 doubling every 25 years. I was happy with this until I engaged a solicitor who pointed out it would cost £77k over the life of the lease. While this might be true, in reality this lease would unlikely run beyond 45 more years (i.e. would be renewed with 80+/- years left to run) so pointing this out feels like scaremongering on the solicitors part in an attempt to take the formal more costly route. I guess my question is do the terms offered by Clarion sound reasonable and would they be accepted by most mortgage lenders (I intend to sell)?

AdrianC

25yr doublers work out historically a little bit more than inflationary increases - so, yes, they're accepted.

I presume this informal extension was considerably cheaper than a statutory +90yr peppercorn?

davidmcn

marvellouspotato said:

I engaged a solicitor who pointed out it would cost £77k over the life of the lease.

I can't see how relevant that is, when you bear in mind that the bulk of that would be towards the end of the lease and the effect of inflation by then (for example, £77k today would have been only about £600 125 years ago - or the final annual rent of £1600, which would start in 100 years time, would have been about £29 100 years ago). Obviously nobody knows what inflation will do in the distant future but you get the idea.

princeofpounds

It's true that the 77k figure is not particularly useful for judging anything.

However, saying whether you have a good deal or a bad deal is impossible without comparing the statutory valuation and terms with the valuation and terms you have negotiated. For that we need more data, primarily the value of your flat, and the exact terms you have negotiated, including the extension price!

There's also a consideration that if you thinking about selling, trading a lower upfront payment for worse ongoing terms may be a logical thing to do - flat buyers tend to underestimate the value of those long-term ongoing costs compared to thousands on the asking price.

marvellouspotato

AdrianC said:

25yr doublers work out historically a little bit more than inflationary increases - so, yes, they're accepted.

I presume this informal extension was considerably cheaper than a statutory +90yr peppercorn?

The informal route is 1400 for the premium with related lower other costs (solicitors etc). The statutory route would be closer to 4000 with higher other costs. The flat has been valued at 275k for the purposes of the lease extension......

AdrianC

So £2,600 + costs difference between the routes. Call it £3k in all?

£100/year for the next 25yrs = £2,500, leaving £500 at £200/year thereafter = +2.5yrs.

So the simple breakeven on the statutory versus informal routes comes at 27.5yrs (in other words, non-compounded 3.6% annual RoI), and that's before taking any account of increased future saleability from a 45yr longer, peppercorn lease...

Seems to me that the statutory is a no-brainer, once you scratch the surface below the ostensibly cheaper up-front price.

marvellouspotato

davidmcn said:

marvellouspotato said:

I engaged a solicitor who pointed out it would cost £77k over the life of the lease.

I can't see how relevant that is, when you bear in mind that the bulk of that would be towards the end of the lease and the effect of inflation by then (for example, £77k today would have been only about £600 125 years ago - or the final annual rent of £1600, which would start in 100 years time, would have been about £29 100 years ago). Obviously nobody knows what inflation will do in the distant future but you get the idea.

I hadn't done those exact sums but my thoughts exactly - feels like my solicitor is trying to scare me in to taking his more expensive service via a formal route. My one lingering doubt is the extent to which the leasehold scandals of recent times have muddied the waters so that either the average punter is put off completely by the thought of a leasehold and/or the mortgage companies start to be put off - on the latter point I'd hope the mortgage companies would have a bit more nous.....

marvellouspotato

princeofpounds said:

It's true that the 77k figure is not particularly useful for judging anything.

However, saying whether you have a good deal or a bad deal is impossible without comparing the statutory valuation and terms with the valuation and terms you have negotiated. For that we need more data, primarily the value of your flat, and the exact terms you have negotiated, including the extension price!

There's also a consideration that if you thinking about selling, trading a lower upfront payment for worse ongoing terms may be a logical thing to do - flat buyers tend to underestimate the value of those long-term ongoing costs compared to thousands on the asking price.

275k valuation of flat. 4000 for formal route with peppercorn rent versus 1400 informal route for 125 years and ground rent of 100 doubling every 25 years.....the advice I read elsewhere seems to be skewed towards the risks of dodgy freeholders. I've got absolute faith in mine - Clarion Housing.

marvellouspotato

AdrianC said:

So £2,600 + costs difference between the routes. Call it £3k in all?

£100/year for the next 25yrs = £2,500, leaving £500 at £200/year thereafter = +2.5yrs.

So the simple breakeven on the statutory versus informal routes comes at 27.5yrs (in other words, non-compounded 3.6% annual RoI), and that's before taking any account of increased future saleability from a 45yr longer, peppercorn lease...

Seems to me that the statutory is a no-brainer, once you scratch the surface below the ostensibly cheaper up-front price.

Thanks Adrian - you're right of course but take into account it would be me paying the extra 3k and I'm not convinced this would translate into a much bigger mark up on the sale potential over the next 2 years in which I'd hope to sell ( economy tanking aside). Also, would your average punter care if it was 125 v 165 years? I dont know - definitely food for thought though....

AdrianC

It's not all about the sale price...
The easier saleability is more likely to come from easier mortgageability - lenders have no issue with 25yr doublers... currently. But there is currently an issue with GR above £250 converting into an AST. This is a way off for your new lease, and it is almost certain to cease to be a problem before then. But, even so, a peppercorn lease will always be more saleable.

Having said "it's not all about the sale price", often the easiest way to get round a perceived saleability issue is to drop the price... And £3k is the kind of figure in a sale that can easily just get knocked off in a game of split-the-difference...

marvellouspotato

Hello! I was coming around to the idea of going down the formal route and then this new legislation has been proposed (i.e. prospect of 990 years) - any thoughts on what someone in my position would do (i.e. keen to get the lease sorted possibly with the intention to put it on the market this year)? I'm considering continuing with the formal route regardless - 170 years might as well be 990 years for the next person is my working assumption.....