Richard Murphy (MRICS, RICS Registered Valuer) is a Director with RJC Surveyors, and specialises in leasehold extensions and compulsory purchase. In this feature he addresses a question from a shared owner with a dilemma; whether or not to extend a short lease now, in the context of Government’s proposed leasehold reforms.
“My shared ownership lease is currently at 84 years so I’m considering my options going forward. We’re planning to move from the property before the lease hits 80 years but are trying to work out whether we should do the lease extension before we sell or leave it to the next purchaser.
My housing association have said that although I’m a shared owner they will broadly follow the statutory model. But I don’t want to extend the lease and then find out that I could have got it to 999 years if I’d just been a little more patient. When can we expect the implications of the reforms for shared owners to become clear, and timelines established?
Also does lack of EWS1 affect lease extension? We’re in no-man’s land on the latest RICS guidance. The building has 6 storeys, and cladding is somewhere around the 25% ‘substantial’ threshold. I’m not sure if it will fall above or below that threshold yet, and I’m also not sure who will be able to tell us.
Richard says….. your dilemma is one shared by many shared owners with short leases. Should you wait for proposed reforms (the right to 990-year lease extension with zero ground rent) to be implemented before seeking your own lease extension, or should you extend now?
Bad news and good news
The answer to this dilemma can be found in the extensive Savills Research.
First the bad news:
According to this research, values of leases fall by 7.5% when the lease drops to 84 years. (See table below which shows a differential of 8.5% but it’s convention to allow 1% to freehold value). It probably isn’t as much as this in your location, as this research was based on sales in Prime Central London but it indicates the problem.
Second the good news:
The good news is that the corollary is also true. If you have a lease extension the value of the lease should increase by up to 7.5%.
Should you wait for the reforms?
The existing statutory model allows for a 90 year lease extension anyway which will give you a lease of 174 years. The same research shows that for leases above 130 years, any extra years will not add value. Therefore taken in isolation, it’s not generally worth waiting for the reforms as the extra 900 years will not add any further value.
The 80-year threshold
Leasehold extension is much more expensive once there are fewer than 80 years remaining on the lease. Our experience shows that cost of lease extension can double overnight once this threshold is reached. You are therefore wise to consider the issue now, while you still have 4 years left.
Proposed Government reforms
There isn’t any certainty at the moment as to the implications of proposed reforms for shared owners, and when reforms will be enacted. Many believe the process could take 2-4 years and it is possible that not all the reforms will take place. I have written an article about this recently.
However, the cost of your leasehold extension will increase with each passing year given that your lease length will continue to decrease and on the assumption house prices continue to rise. Ultimately, your personal circumstances will determine whether you risk delaying or push ahead.
Cost and benefit
In these circumstances – 84 years unexpired on a shared ownership lease where there are cladding issues (and assuming no ground rent) – I would recommend applying for a lease extension. The premium is likely to be approximately 2% of the property’s value plus fees, but it should add more than this to its value (see above).
The uncertainty in value as a result of cladding may help to reduce the premium. Once the valuation arrives, I would advise that you get the premium checked by an independent surveyor. Many lease extension surveyors provide relatively cheap desktop appraisals. It’s important to make both valuers aware of all your cladding issues. (To give you an idea of likely cost my own firm offer this checking service for £250 plus VAT).
Considerations to take into account could include:
- Whether you intend to staircase up to buy a larger share in the near future . If that is the case it may be cheaper to do this before you extend.
- Weigh up the costs and analyse the benefits to your share proportion. Many housing associations charge 100% of the lease extension costs, even though you only have a 25%-75% share.
- It’s always best to extend before the lease falls to 80 years or below and the sooner this is done, the cheaper it will be and the greater the financial gain by increasing the value of your flat.
Once you have all the facts, you can then make a decision that is right for you, with the help of an independent valuer acting on your behalf.
Considerations to take into account updated 17 March 2021.
Richard Murphy (MRICS, RICS Registered Valuer), Director, RJC Surveyors
Phone: 020 7499 8043.
Twitter: @RichardMurphy1 and @RJC_Surveyors
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