Planning ahead – 72 Years Remaining on Lease

by Readers Question

11:40 AM, 23rd February 2015
About 5 years ago

Planning ahead – 72 Years Remaining on Lease

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Planning ahead – 72 Years Remaining on Lease

I’m hoping for some advice as to what if anything I should be doing in the near future so as to avoid a potential problem in the future. Planning ahead - 72 Years Remaining on Lease

I bought a leasehold flat in 1992 which I rent out and have done so for many years and I plan on doing so for many more years to come. The property is a converted house with just two units, one ground floor flat and one upstairs flat which is the one I own.

Looking back at the lease, it was a 99 year lease granted in 1988, so as of now I have 72 years remaining. As I understand it in the unlikely event that I may want to sell the property in 10 years time the remaining duration of the lease will be at a threshold where lenders may not be keen to lend.

The freeholder owns the ground floor flat and has done so since inception in order to protect his elderly mother who lives there although she has recently gone into care and now the freeholders grandchild now lives there.

I have approached the freeholder already to let him know that if he wants to ever sell the freehold I would like first refusal which he has agreed to but I don’t expect him to sell the freehold for as long as he owns the downstairs flat.

The freeholder is a reasonable person and only owns the freehold to safeguard his family’s interest.

So as time ticks by, the cost of a lease extension increases.

I am confused as to what if anything I could do or should do and what the implications will be for me further down the line if no action is taken. Am I sitting on a ticking financial time bomb?

Fortunately I am solvent and the property is unencumbered.

Many thanks in advance.

Paul Baker



Comments

John Simpson

9:57 AM, 25th February 2015
About 5 years ago

Sorry Mandy. The written word always sound harsher than it was meant. But your post does read and I quote "lenders really only start to worry when the term gets down to around 50 years or so" which is just not so I'm afraid and gives out the wrong impression to others on here. The fact is there are precious few who'll go that low and those that do, may well start to restrict the repayment term quite severely. 60 yrs unexpired used to be the cut-off point for the majority but as the saying goes, in terms of leases outstanding terms, 70 is the new 60.

Mandy Thomson

10:39 AM, 25th February 2015
About 5 years ago

Reply to the comment left by "John Simpson" at "25/02/2015 - 09:57":

HI John

Yes - I take your point, and I've just done some more research and I agree about 70 years being the cut off point for most lenders offering standard mortgages, and you are absolutely right that everyone posting information on here should do their best to ensure its accuracy (though there is an element of caveat emptor here - most posters are not researchers or journalists).

With less than 70 years remaining on a lease, it's my understanding there are mortgages available, but these are specialist short lease mortgages offered by only a few lenders. You would also need to work with a specialist broker.

What I believe my broker means is that when you get down to 53 - 50 years then there really are NO lenders currently on the market who will touch you, so your only option is to sell to a cash buyer if you need to release equity from that particular property, or of course leverage another property in your portfolio, if you're lucky enough to be in that position.

John Simpson

11:32 AM, 25th February 2015
About 5 years ago

Reply to the comment left by "Mandy Thomson" at "25/02/2015 - 10:39":

That's right Mandy. I'm a mortgage broker by trade and have been in the industry since I was 18 (I'm 60 next month yikes) and spend most of my days trying to find lender's who'll do the unusual including short leases.

Mandy Thomson

12:04 PM, 25th February 2015
About 5 years ago

Reply to the comment left by "John Simpson" at "25/02/2015 - 11:32":

Having to source specialist lenders for very difficult clients (but with some lenders nowadays, just about any of us can fall into their "difficult" or "impossible" category...) sounds like a nightmare - though it must be interesting too?

I would suspect that prior to the credit crunch, most lenders more amenable to lending on short leases? Are lenders likely to become more amenable again in the future (though I certainly wouldn't want to take a gamble on that)?

Tony Lilleystone

12:23 PM, 25th February 2015
About 5 years ago

Re previous comments by Mandy Thomson and John Simpson.

Sorry if I sounded a bit harsh in my previous comment, but thanks John for your expert comments. It is my understanding that mortgageability is an important factor in valuing a property, and the fact is that if an average buyer can't easily get a mortgage on a particular property then that is something which is going to affect its value.
So if a property has less than 70 years left on the lease then most potential buyers are going to find their choice of lenders seriously restricted, and they would be likely to have to pay higher rates if they could get a loan. This means that the pool of potential buyers will be restricted and will therefore affect the value of the property.
Given the pressure on lenders from the Bank of England and elsewhere for them to be more responsible in their lending I would think it unlikely that lenders are likely to relax their rules on length of leases anytime soon - if anything they are more likely to increase them.
By the way, I happen to think that the English system of leasehold ownership of flats is totally outdated and needs a radical overhaul – something like the US condominium system (where individual flats are owned outright with standard arrangements for the management of the building) should be mandatory. Of course the companies which invest in freeholds on a commercial basis are a powerful parliamentary lobby and will oppose any major reform. But all that will have to be another discussion.

John Simpson

14:12 PM, 25th February 2015
About 5 years ago

Reply to the comment left by "Tony Lilleystone" at "25/02/2015 - 12:23":

It's a typical knee-jerk over-reaction by lenders to what is supposed to be high-level changes suggested by the FSA (Now FCA). But someone in the lender's Sale Prevention Squad (sorry I meant Compliance dept) has got busy and interpreted it that way. Then once one pulls their toe a bit further out of the water, the others all follow suit not wishing to be left exposed as the only one left doing 60yrs. Then a few years down the line when people start questioning why lending seems flat, the FCA in its defense says it never asked lenders to react that way. Lenders in turn have already started to realise their original raison d'etre to lend money is being compromised by all these new rules they've put in place and the tide starts turning the other way. So I wouldn't mind betting that eventually they'll start going back to the old 60yr rule!!

Puzzler

8:43 AM, 25th July 2015
About 4 years ago

You cannot go down the statutory route for the following reasons:

There is no right of collective enfranchisement (but there is a right to renew the lease) where:

• The building is a conversion into four or fewer flats and not a purpose-built block AND* ALSO

• the same person has owned the freehold since before the conversion of the building into flats AND* ALSO

• he or an adult member of his family has lived there for the past twelve months

He does have to give you first refusal however.

You should discuss with the freeholder your position and negotiate either voluntarily with him to purchase half the freehold. Or to extend the lease which you can do through a statutory or voluntary route. The statutory is best for resale value and cheapest but may take longer.

You should find a solicitor and surveyor to do this as it is a specialist area. Either way start soon as the costs will go up exponentially.

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