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Residential Lease Extensions and Leasehold Reform | HK News

Residential Lease Extensions and Leasehold Reform

| Published on April 28, 2021

Should I extend my lease?

If you own a leasehold flat, it is important to check the number of years that remain on the lease.

A leasehold property is considered a ‘wasting asset’ because, as the length of the lease decreases, the value of the property drops.

It is possible to extend the term of the lease but this will be at a cost. A premium is payable to the freeholder who is, thereby, postponing the date at which he will receive the freehold of the property back free of the lease.

Whilst we talk in terms of “a lease extension”, this is actually a surrender and regrant of a lease on broadly the same terms as the existing lease save for term and rent.

The 80 year lease

In accordance with the law as it stands today, we recommend extending the lease when it approaches the 90 year mark and certainly before the lease drops below 80 years. If you extend the lease where there are less than 80 years remaining on the term, the premium payable to the freeholder increases by an additional sum known as ‘marriage value’.

Broadly, marriage value is the difference between the value of the property before and after the lease extension. The freeholder grants the leaseholder permission to extend the lease which increases the value of the property, benefitting the leaseholder. Therefore, in accordance with the current law, the freeholder is entitled to payment of half of this increase in value.

Can I sell my property if I have a short lease?

If you plan to sell your property and the lease is considered ‘short’ (i.e. below 90 years), then it is likely you will need to extend the lease before you can sell the property.

Sellers with short leases may find it difficult to sell because mortgage lenders have specific requirements as to the length of lease term on which they will lend.

How can I extend my lease?

It is possible to agree terms with the freeholder of your flat to extend the term of the lease. The freeholder may, however, ask for an unfairly high premium or ground rent.

If you have owned the property for two years then you may be eligible to apply for a statutory lease extension to extend your lease by 90 years.

An upfront premium is payable to the freeholder and you would need to appoint a valuer to assess the value of the lease, provide you with a figure to offer and then negotiate with the freeholder’s valuer to reach a final figure. Your solicitor serves notice on the freeholder to start this process in motion.

Upon service of the notice, you will become responsible to pay not only your own costs but the reasonable legal costs and surveyor’s costs incurred by the freeholder, in respect of the lease extension.

The freeholder has two months from the date of your notice to respond with a counter-notice. If the freeholder disagrees with the offer made for the premium or any other matters suggested by the notice, your valuer and the freeholder’s valuer may begin negotiations.

If an agreement of the terms of the new lease cannot be reached, then two months after you have received the counter-notice, you can apply to the First Tier Tribunal to determine matters.

Upon completion of the lease extension, 90 years is added to the current term of the lease and the ground rent payable becomes nominal.

Leasehold Reform

On 7 January 2021, the Housing Secretary, Robert Jenrick, announced there will be a reform to leasehold property law.

How will the Leasehold Reform impact lease extensions?

The main announcements in respect of lease extensions include the right to extend the lease by 990 years with zero ground rent payable to the freeholder.

The marriage value cost to the freeholder is also set to be abolished and an online calculator will be made readily available by the government, to easily determine the cost of extending the lease.

When will these changes come into force?

There has been no confirmation or set date as to when this reform will actually come into practice. It is expected that it may be three to four years before the new law becomes enforceable.

At this stage, these promised changes are not set in stone and may be amended when put before the House of Commons. This makes it difficult for those with shorter leases to decide whether or not to extend the lease now or at a later stage.

If you would like further information in respect of extending your lease or regarding the announcement of the reform and how this may affect you, our expert land law lawyers at Humphries Kirk are available to assist. Find your local office, and contact our team today.

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