Renovating apartment before the lease extesion

AndrewLena

Hi All,

Im in the process of buying an Apartment with a short lease (52 years) and I was wondering if it would be possible (Or a good idea) to renovate it before I extend the lease. Because of the new leasehold reforms that have just passed I want to sit and wait a little to see what happens

NameUnavailable

Hopefully you're aware of the process and likely costs involved to extend that lease?

Recent changes to leasehold law will (eventually) remove 'marriage value' so you are probably better off waiting for the new laws to be implemented before extending.

The length of lease therefore should have nothing to do with whether or not you 'renovate' the place - you will need to check the lease to find out exactly what you can or can't do to the flat and or what needs freeholder permission (you will need permission for any proposed structural changes but some leases can be much stricter and demand permission or any changes you intend to make).

AndrewLena

NameUnavailable said:

Hopefully you're aware of the process and likely costs involved to extend that lease?

Recent changes to leasehold law will (eventually) remove 'marriage value' so you are probably better off waiting for the new laws to be implemented before extending.

The length of lease therefore should have nothing to do with whether or not you 'renovate' the place - you will need to check the lease to find out exactly what you can or can't do to the flat and or what needs freeholder permission (you will need permission for any proposed structural changes but some leases can be much stricter and demand permission or any changes you intend to make).

Thankyou for your very informative reply. I will definitely wait to see the outcome of marriage value hence my decision to delay. After I get permission from the landlord is it a big process paperwork wise to start the renovation?

eddddy

If you plan to do a statutory lease extension, whether you do it before or after renovating the flat shouldn't affect the cost of the lease extension.


As mentioned above, the Leasehold and Freehold reform act 2024 is likely to come into effect in 2025/2026 which abolishes marriage value, so leases under 80 years would be cheaper to extend.

But some freeholders are arguing that abolishing marriage value would infringe their human rights, and are threatening to challenge the government in court. (i.e. The Act is arbitrarily taking money away from freeholders and giving it to leaseholders.)


There's also another issue - deferment rates (or discount rates) - when extending a lease. The rate was set by case law at 5% in 2007, when interest rates were generally higher.

So some people are suggesting that the discount rate might be reduced as part of the new act, which would increase the cost of lease extensions.

So there isn't 100% certainty either way.

eddddy

AndrewLena said:

Thankyou for your very informative reply. I will definitely wait to see the outcome of marriage value hence my decision to delay. After I get permission from the landlord is it a big process paperwork wise to start the renovation?

Making alterations to flats can sometimes be a bit of a minefield - especially if you have a difficult freeholder.

You should start by reading the lease to see what it says about making alterations.

Some types (or all types) of alterations might be prohibited by the lease.  Other types of alterations might need consent from the freeholder.


You also need to be aware of exactly what parts of the building 'belong' to you, and what 'belongs' to the freeholder.

For example, the external walls typically belong tp the freeholder - so you would have no right to cut holes in them for pipework, extractor fans, boiler flues, etc (unless the lease says you can).

AndrewLena

eddddy said:

If you plan to do a statutory lease extension, whether you do it before or after renovating the flat shouldn't affect the cost of the lease extension.


As mentioned above, the Leasehold and Freehold reform act 2024 is likely to come into effect in 2025/2026 which abolishes marriage value, so leases under 80 years would be cheaper to extend.

But some freeholders are arguing that abolishing marriage value would infringe their human rights, and are threatening to challenge the government in court. (i.e. The Act is arbitrarily taking money away from freeholders and giving it to leaseholders.)


There's also another issue - deferment rates (or discount rates) - when extending a lease. The rate was set by case law at 5% in 2007, when interest rates were generally higher.

So some people are suggesting that the discount rate might be reduced as part of the new act, which would increase the cost of lease extensions.

So there isn't 100% certainty either way.

I think with this uncertainty I am in a position to negotiate a better deal in any case. The freeholder also has uncertainty so it is a risk for them as well (especially if the deferment rate stays the same) About the deferment rate, for the life of me i cant understand what it means. How is it calculated in Laymans terms? is there an easy example somewhere on how it is calculated? 

BarelySentientAI

AndrewLena said:

eddddy said:

If you plan to do a statutory lease extension, whether you do it before or after renovating the flat shouldn't affect the cost of the lease extension.


As mentioned above, the Leasehold and Freehold reform act 2024 is likely to come into effect in 2025/2026 which abolishes marriage value, so leases under 80 years would be cheaper to extend.

But some freeholders are arguing that abolishing marriage value would infringe their human rights, and are threatening to challenge the government in court. (i.e. The Act is arbitrarily taking money away from freeholders and giving it to leaseholders.)


There's also another issue - deferment rates (or discount rates) - when extending a lease. The rate was set by case law at 5% in 2007, when interest rates were generally higher.

So some people are suggesting that the discount rate might be reduced as part of the new act, which would increase the cost of lease extensions.

So there isn't 100% certainty either way.

I think with this uncertainty I am in a position to negotiate a better deal in any case. The freeholder also has uncertainty so it is a risk for them as well (especially if the deferment rate stays the same) About the deferment rate, for the life of me i cant understand what it means. How is it calculated in Laymans terms? is there an easy example somewhere on how it is calculated? 

It's a rate used to calculate the present day value of the landlords right to take possession at the end of the lease.

Or in other words, at what interest rate would the amount paid for the extension match the value of the property at the end of the lease.

Say you have an 80 year lease on a flat valued at £200k.  Using the Sportelli rate of 5%, an extension would cost £4000 because £4000 put in an account with 5% interest for 80 years would end up with £200k.

The deferment rate isn't calculated differently for each extension, that's not the bit you need to work out.

For examples of change, if the rate was 4% the cost would go up to £8500, and if it was 3.5% (which was argued for in a recent tribunal hearing) the cost would go up to £12500.  That's the power of compound interest over many decades.

eddddy

AndrewLena said:

 About the deferment rate, for the life of me i cant understand what it means. How is it calculated in Laymans terms? is there an easy example somewhere on how it is calculated? 

The theory behind a statutory lease extension is that the leaseholder has to compensate the freeholder for their losses.

There are multiple parts to this compensation calculation - I'll just mention just one part...


Let's say your flat is worth £200k and your lease has 52 years left. So you have to compensate your freeholder for not getting a £200k flat in 52 years time.

• So if you paid the freeholder £9,250 compensation today, and the freeholder could invest it at 5% interest per year, they would end up with £200k in 52 years time

• Or if you paid the freeholder £31,000 compensation today, and the freeholder could invest it at 3% interest per year, they would end up with £200k in 52 years time

So put another way, if the deferment rate is changed from 5% to 3% - using the above example, the lease extension would cost £20k extra.

Freeholders argue that you might have been able to get 5% interest on money in 2007, but you can't any more.

You can try googling lease extension deferment rate - but I haven't seen any sites that explain it simply.

starving_artist

AndrewLena said:

About the deferment rate, for the life of me i cant understand what it means. How is it calculated in Laymans terms? is there an easy example somewhere on how it is calculated? 

There's a really helpful explanation here: https://homehold.org/standard-article/leasehold-reform/#cheaper

AndrewLena

eddddy said:

AndrewLena said:

 About the deferment rate, for the life of me i cant understand what it means. How is it calculated in Laymans terms? is there an easy example somewhere on how it is calculated? 

"You can try googling lease extension deferment rate - but I haven't seen any sites that explain it simply."

Dont think I need to, you have provided a very easy to understand example, thanks!

Yorkie1

eddddy said:

If you plan to do a statutory lease extension, whether you do it before or after renovating the flat shouldn't affect the cost of the lease extension.


As mentioned above, the Leasehold and Freehold reform act 2024 is likely to come into effect in 2025/2026 which abolishes marriage value, so leases under 80 years would be cheaper to extend.

But some freeholders are arguing that abolishing marriage value would infringe their human rights, and are threatening to challenge the government in court. (i.e. The Act is arbitrarily taking money away from freeholders and giving it to leaseholders.)


There's also another issue - deferment rates (or discount rates) - when extending a lease. The rate was set by case law at 5% in 2007, when interest rates were generally higher.

So some people are suggesting that the discount rate might be reduced as part of the new act, which would increase the cost of lease extensions.

So there isn't 100% certainty either way.

Just wondering whether there is in fact any certainty that the Act (or, at least, the relevant parts to this discussion) will be implemented at all, if there is (as seems likely) a change of Government in a month. What views did Labour hold during the passage of the Bill through Parliament? Have there been any indications as to their future views re. the legislation?

If there is a realistic chance that it might not be brought into force, that should also be a factor in considering next steps.