The issue of leasehold properties has been brought into sharp focus in recent years
David Gilman is partner in charge of Blacks Connect
It perhaps won’t surprise you to learn there are approximately two million leasehold flats in England and Wales and in the future, with land at a premium and developers looking at ways to maximise their investments, these numbers are likely to grow substantially. As a mortgage adviser you will be well aware of the myriad of potential issues that come with purchasing or remortgaging a leasehold property particularly around the way different lenders deal with them. To say there is not a standard approach would be something of an understatement and this can cause time-consuming delays and increased cost across the piece that the client had simply not anticipated or budgeted for.
The issue of leasehold properties has been brought into sharp focus in recent years not least because there was a glut of new-build properties established in the late 70s and 1980s which have obviously seen their lease term fall further and further. In terms of remortgaging and refinancing this certainly sets the lenders’ hair on end and, again while every lender is different in this regard, most will only lend if the leasehold term is at least the mortgage term plus 35/40 years on top.
Needless to say that many properties built and bought 35 years ago will be seeing their terms come close to this, and this is without factoring in that a number of lenders require 99-year leases before they will even look at a case. Those with leases below the lenders’ requirement and wanting to either sell or remortgage are left looking at a number of options, perhaps to sell at auction or to a cashbuyer, but for most the only option is to extend the lease in order to meet the lender’s needs.
As you might know, the cost of doing this can be high, particularly if the lease has slipped below 80 years when the client will have to pay the cost of the lease extension plus half of the property’s ‘marriage value’ – which can be a lot of money depending on the value such an extension would add to the flat. Remembering of course that the client will have had to own the property for at least two years in the first place in order to earn the right to extend it.
There are many things for the client to consider when looking at a leasehold extension – particularly if it’s below that golden number of 80 – and this is where advisers can support and help them to ensure it is financially worth their while and they have a specialist legal firm working on their behalf. One point which is often forgotten in this whole process is that the leaseholder is responsible for the freeholder’s reasonable legal and valuation costs, so this must also be factored into the sums when looking at the overall price.
In recent times we’ve certainly noticed an increase in the level of complexity around leasehold extension work and the fact that not every solicitor in the land is an expert in this area and has the knowledge and skills to complete the work quickly and effectively. Indeed our own business has recently recruited three specific staff members who are experts in their field and will carry out all our lease extension work, rather than us having to introduce this work outside the business.
The more technical name for this process is leasehold enfranchisement and any client looking for a solicitor to handle this type of work should ensure they are members of the Association of Leasehold Enfranchisement Practitioners. As I mentioned above, this is a specialist legal area and your clients will need firms who are well-versed in the potential banana skins of this work.
Of course, when we talk about leasehold enfranchisement, we are not simply talking about ‘tenants’ seeking lease extensions for their flats or houses, there is also other areas which will require a solicitor’s involvement. Perhaps, you have a group of tenant clients who are acting together in order to purchase the freehold of their building, or want to exercise their right to manage the overall property; you might also have landlord clients who want to restructure their portfolio in order to take advantage of the leasehold reform legislation or you might have landlords who need advice on short-term lettings for investment purposes, or even prospective tenants who want information on the terms of tenancy agreements for occupation.
All this comes under the ‘leasehold enfranchisement’ banner and therefore advisers who have access, for example, to the services we offer here at Blacks’ can be confident their client is securing the best legal advice available. This should certainly drive confidence in terms of the advisers’ ability to secure the necessary mortgage or loan finance, and should enable the case to complete quickly rather than waiting an inordinate amount of time to ultimately fail somewhere down the line. This would not be the right option for anyone and therefore advisers and their clients should tackle this problem early enough that it does not become the defining factor.