The Daily Telegraph - Money
Why a cheaper lease extension can cost you
Leaseholders have been warned about the perils of informal extensions rather than using the law to lengthen their leases.
Properties with a lease of under 80 years are viewed warily by mortgage lenders and can be difficult to sell. Earlier this year the Government announced a radical overhaul of property law, including the right to extend leases to 990 years and with annual ground rents set to £0. In the meantime, leaseholders must navigate the existing archaic system.
Maureen French, 69, a former Ministry of Defence worker who lives in Bicester, wanted to use equity release against her retirement flat to help fund her retirement.
She was told the 66 years left on her lease were not enough, so she went to the freeholder to ask for an extension. She chose to extend it for 60 years through an informal deal, paying less than she would have with a standard arrangement. But the terms mean that she must now pay £500 a year in ground rent.
“I said, ‘ Does this entitle me to any reduction in the ground rent?’ And they just came up with all this legal stuff that I didn’t understand, so I just left it,” she said. “In the end, you get to the point where you just get fed up with fighting all the time with everything.”
Property campaigner Sebastian O’Kelly warned leaseholders to use the standard 90-year extension which entitles them to a peppercorn ground rent of zero.
“Always, always, always do a statutory lease extension and go for a 90-year lease extension,” he said. “The cheaper an informal lease extension is, the more expensive it is down the line,” he said, as annual ground rent payments stack up.
Another Telegraph Money reader, Brian Poulton, 77, of Bracknell, wanted to extend the leases on two flats he owned with 70 years left. He wrote to his freeholder who offered him an informal, cheaper extension to 100 years with rising ground rents, as well as the formal route, which would have reduced his ground rent to zero and extended the lease to 160 years. Statutory lease extensions work by adding a standardised 90 years to a flat’s lease.
“They were obviously trying to get me to take one of these ground rent options which were increasing on a regular basis,” he said. But it was cheaper, so he pressed ahead.
But with the negotiated option, which allowed both parties to haggle over the details of the lease, his lawyers found a discrepancy in the new agreement compared with the old one over access to the property for maintenance.
Mr Poulton estimated that the legal wrangling added £10,000 to his final bill of £ 30,000 and gave him and his wife about 200 hours of work in answering emails and questions and reviewing paperwork. He eventually decided against the informal deal and went for a 90-year extension, where most of the terms are set by law. “It was all- consuming,” he said. Had he known the details, he “would have gone straight down the statutory route”.
Freeholders often turn out to be firms that invest in freeholds for the regular income, according to Richard Murphy of Richard John Clarke surveyors. “They are pretty switched on and are obviously trying to maximise profits,” he said.
They can then offer “pretty terrible deals” with which leaseholders have nothing to compare, he added. “But the leaseholder doesn’t necessarily know they’re terrible. And other times they don’t care, because they’ve sold a flat already. There’s a mixed bag of why people go for the informal route,” he said.
Freeholders do not want to give up ground rent payments and will offer a shorter extension to keep cash flowing in on a regular basis.