Leasehold shock: what can I do?

mills112

https://forums.moneysavingexpert.com/discussion/comment/81973692#Comment_81973692

we have done a lease extension through the statutory route. we did not complete the process as we decided to sell the property instead without extending (the property was a rental with 86 years left on the lease)

the formula that calculates the premium is not an exact equation because the elements that go into it to derive the answer is very much subjective and up to negotiation as you are effectively buying the property again! it was why we had to employ a specialist solicitor who can negotiate as well as deal with the legal side of the extension, such a solicitor is not cheap and we were quoted £3k - £4k for this. you also have to pay the freeholder's solicitors fees. then you have to employ a surveyor who specialise in valuations for lease extension, who again is a specialist surveyor that can negotiate. you also have to pay the freeholder's surveyor! the costs just keep mounting. so even without the actual premium for the extension, you are already facing nearly 8k - 10k of professional fees! our freeholder was a council and they also wanted 2k for their adminstration fees to deal with the extension.

the new laws is meant to come up with a more prescriptive formula where there is less negotiation involved, but I am not sure if this has been formalised? as far as i am aware, this hasn't been formalised at all.

Catonthemoon

“But I’d much rather keep the flat and contnue to rent it. It’s in a popular seaside town and who knows, my kids or grandkids might like to live there some day”

(1) Is the rent covering your mortgage repayments?

(2) Have you had the flat valued?

You say you would prefer to keep on renting it & at a later date your kids/grandkids might like to live there. If either or both of those come to fruition, bear in mind that there’s the possibility that the lease could reduce down to 0 years (especially if nobody has their eye on the ball)!

In that case, I believe, but am not entirely certain of this…if you haven’t been able to make a decision during that time, ownership of the property will revert back to the freeholder. You will also lose the equity in the property (if any).

One final thought: don’t know what part of the country you’re in (high v low rent), but let’s say you’re receiving £10000 pa in rent. If you were to continue receiving that for the next 47 years, it could be worth considering, given your circumstances. I guess you would have to weigh that up against other factors (ie how long remains on the mortgage/how much equity is there in the property/you would no longer have that asset to pass on to children etc).

Good luck, Cotm.

arunadasi

@mills112 if you need the money now to repay the mortgage, then that is the best way to sell it. £49,000 to extend the lease does not sound too much to be honest as they are often unaffordable…….

if you have the money to pay off the mortgage, then you can hang on to the property and hope that the new legislation may reduce the premium to extend the lease as the new rules, which no one has yet come up with exactly how it is going to work! is that the lease extension will be more prescribed and so won't cost so much to do as there will no longer be a negotiation process with the freeholder on the premium but it will be determined with a formula (which they haven't yet come up with!) and so it should in theory be cheaper.

This is what I hope to do.
i’m now looking to get a Credit Union loan for 50k, and I will apply for a grant with an organisation that has helped me out in the past. Fingers crossed…

arunadasi

@eddddy Where did you get that figure?

A letter from the freeholder.

mills112

https://forums.moneysavingexpert.com/discussion/comment/81974456#Comment_81974456

all the new legislation for the lease reform is meant to reduce the cost of extending leases and to make it a much quicker process. it is still work in progress so hopefully, if you can afford to hang on to it, you will get better money for it when all the reforms have been worked out.

eddddy

https://forums.moneysavingexpert.com/discussion/comment/81974460#Comment_81974460

So as I mentioned, £49k might be a sensible price, or it might be an unrealistically high price.

Check it using the online lease extension calculators.

mills112 said

if you can afford to hang on to it, you will get better money for it when all the reforms have been worked out.

Hopefully, that will be the case. But freeholders are threatening to take the government to court over this, so it might delay the reforms, or maybe the courts will decide that the reforms can't happen.

And under the current rules, a lease extension is likely to get more expensive each year - because the lease becomes shorter and property prices increase.

So it might be a bit of a gamble.

ThorOdinson

What is the reason why the price to extend goes to as you get closer to the lease expiring?

itsthelittlethings

https://forums.moneysavingexpert.com/discussion/comment/81975225#Comment_81975225

Because it's worth more to the buyer.

eddddy

ThorOdinson said

What is the reason why the price to extend goes to as you get closer to the lease expiring?

In simple terms, the statutory formula for calculating the price of a lease extension works like this…

• The freeholder expects to get the flat back at the end of the lease.
• If you get a lease extension, you have to pay the freeholder compensation for not getting the flat back (until a further 90 years later)

So here's how part of the formula works…

For the sake of an example, let's say I am the freeholder, you are an investor and the flat has a market value of £200k

• If I said to you "How much are you prepared to pay me today for a flat worth £200k which will become yours in 90 years?" - you might say "I'll only pay you £10k for that"

• If I said to you "How much are you prepared to pay me today for a flat worth £200k which will become yours in 60 years?" - you might say "I'll only pay you £15k for that"

• If I said to you "How much are you prepared to pay me today for a flat worth £200k which will become yours in 40 years?" - you might say "I'll only pay you £30k for that"

• If I said to you "How much are you prepared to pay me today for a flat worth £200k which will become yours in 20 years?" - you might say "I'll only pay you £90k for that"

• If I said to you "How much are you prepared to pay me today for a flat worth £200k which will become yours in 5 years?" - you might say "I'll only pay you £160k for that"

So those figures are the amount of compensation a leaseholder has to pay the freeholder, as a result of extending the lease.

So if the lease has 90 years left the freeholder should expect to be paid £10k in compensation for granting a lease extension, and not getting the flat back. If the lease has 5 years left, the freeholder should expect £160k in compensation.

On the same basis as a lease reduces from 49 years to 48 years to 47 years etc, the compensation payable to the freeholder might increase by £1k or £2k or £3k or whatever each year.

(The above is only one simplified part of the formula, there are other parts as well.)

silvercar

That’s a good explanation. You can occasionally see flats for sale with extremely short leases, their price is almost the same as renting the flats on a short term lease.