Are leaseholds worth no value at the end of lease?

And if not already mentioned you have to own the flat for two years before you can extend the lease.

Reply to the comment left by "Paul Willetts" at "10/01/2014 - 13:44":

That's a very good point Paul.

Always search Google for the name of the freeholder and the management company.

Then search again with the words "complaints" or "scam" after their name and see what comes up!
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Thanks guys, again very much appreciated. valuable advice from everybody.

I normally deal with 50 - 60 lease extensions each year so I have some knowledge and whilst much of the comment here is correct it is not true to say that a lease with more than 80 years left goes "cheaply". The calculation when more than 80 years is left is based on a multiple of the ground rent which can be quite high when ground rents on new build flats can easily be £300 per annum. On a high value flat you could be looking at a price of 25 x ground rent plus fees of up to £4,000 depending on the valuer and solicitor you use and, more importantly on the valuer and solicitor who the freeholder uses as you are responsible for his fees as well.

Valuations also take into account the value of the property and, recently, whether it is in Central London or not.

This calculation of ground rent income is why major developers of new build properties are often putting in high ground rents which double every 10 years as they know that many lessees will want to extend from 125 years and they want to maximise their profits. Whilst this may not appeal to leaseholders it is business and there is no law against maximising your returns.

Once the lease goes under 80 years costs of the actual lease extension premium can become very high and Gary's suggestion of £8,000 for a 60 year lease must relate to a fairly low value property.

In all of this although there are guidelines set out it is a matter of negotiation and I do always explain to lessees who ask me to negotiate lease extensions for them I do try and get them the best deal but the freeholder is entitled to maximise his investment and unless and until the concept of leasehold is abolished (which will not happen for existing properties although there may be a time when all new builds have to be commonhold ) the freeholder is entitled to maximise his investment within the guidelines. Therefore, in my opinion, the best way of getting a good deal for both sides is to negotiate the lease extension on an informal basis and reduce the fees paid to solicitors and valuers as much as possible which often gives quite a bit of leeway.

Hi Guys,

I found this on the internet below from a channel 4 programme . It appears that a rogue freeholder can refuse extention by saying he wants to redevelop the property that you own a lease on ??

Is Your Lease Eligibile For Extension?

A freeholder can be approached within the first two years of your ownership to extend a lease but they will usually seek extra renumeration for doing so because it is down to their discretion and not an automatic right. There are various exceptions where a freeholder cannot accommodate a new owner in this way including:

Where the majority of the leaseholders (in a block of flats for example) have applied to buy the freehold
The lease has already ended
You have sub-let the home on a lease of at least 21 years
The lease was already granted for less than 21 years
If your freeholder wants to demolish or redevelop the property

Hi Marcus,

If you are interested in the technical backgound to this, well it goes like this.

The free holder owns a property, they agree to offer a lease of the property to the leaseholder for a set period of time, 99, 999 years or some other period for a single payment. Its not like a rental deal, though as we're all aware there are leases that are periodic and have regular rental payments but they do not usually have a capital value.

The freeholder has effectively separated his interest in the property into two parts. The bit he keeps, the reversionary interest, is the right to retake possession when the lease expires.

The bit he has sold and parted with, the leasehold interest, is the right of the leaseholder to occupy the premises until expiry.

In valuation terms the free holder has got the leaseholders money and his bit is worth virtually nothing when he grants the lease but increases in value as the day when the lease expires grows closer.

In theory at least the day the lease expires the leaseholder surrenders possession and the freeholders interest is worth the full value of the property again.

From the leaseholders view, his interest is worth more or less what he paid on the first day of the lease and nothing at all on the last day. As stated, a residential lease with less than about 70 - 80 years to run is no longer considered sufficient security for a mortgage and would have to be purchased with cash or a simple loan at a higher interest rate than a mortgage. This is because our lease is declining in value.

Of course in real life there is legislation to ensure that leaseholders can extend their leases or even buy the freeholders interest. This is a bit complicated and if you're in a situation like this always get legal advice.

Hi John,

Thanks so much for taking the time to reply, much appreciated.

I was curious to the finer workings of a lease renewal, for example if I bought a lease that had 95 years to run and I spent 20 years being the owner and at 75 years left I asked the freeholder for an extention, and he refused on the grounds that he wanted to develop the place in 75 years time when my lease expires, I guess I could be refused an extention? Does it work like that?

Basically what I am driving at is that I am thinking of buying a flat for 300K on a lease and wanted to make sure that there was not a technical way the freeholder could get his hands on the property and therefore make my investment worth zero at that time. Obviously when you buy a freehold its yours in a straightforward manner..

Reply to the comment left by "Marcus Taylor" at "15/01/2014 - 18:02":

An extension cannot be refused on this basis.
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Thanks Mark, but as a switched on and knowledgeable man that I know you are, how could a rogue freeholder (If he so wanted) get his hands on your lease for free or minimal cost? Are we saying that a standard long lease is safe as any freehold as long as extentions are done within 80 years of expiration?

Reply to the comment left by "Marcus Taylor" at "15/01/2014 - 18:47":

Hi Marcus

In the same way as apples and orages are both fruits, freeholds and leaseholds are both legitimate types of property in England. You can compare them but they are different for all the reasons mentioned above.

There are advantages and disadvantages in both. For example, if one of my freehold houses needs a new roof I know that 100% of the costs is down to me to find. If one of my leasehold flats needs a new roof the cost will be shared between all of the flats under that roof. Leaseholds are generally cheaper to buy but more expensive to service due to ground rents and service charges. There are several more pro's and cons to both forms of ownership.

It may help you to know that my property portfolio consists of both freeholds and leaseholds.

I think most of the concerns you have expressed are unjustified but there are risks in all forms of properties, for example, an area can rapidly go into decline if the wrong people move in, just as an area can rise in value if a good service provider enters the area, e.g. a fantastic new pub, big employer, new train station etc.

I hope that helps 🙂
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