How is lease extension premium calculated? - My Conveyancing Specialist

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17th May 2021

How is lease extension premium calculated?

For starters, you may be interested in learning about what is a lease extension; this is a legal agreement that is meant to extend the rental agreement. The extension is not as important in a business relationship; however, if the agreement is about to expire, the extension can be granted. The extensions are expected in a relationship between a tenant and a landlord, and residential or commercial property is involved. Also, there are instances whereby people lease machinery, equipment, and vehicles. An extension can be granted in such instances.

Lease extension

How Does the Lease Extension Work?

The lease is in the form of a contract whereby the user will pay the owner such that they can use the asset for a specified period. Leasing is common when dealing with a rental property or for machinery, vehicles, plants, or equipment. When dealing with a tangible asset, it is safe to say it is a rental agreement.

When the lease period comes to an end, the user and the owner of the property have some options available. The person leasing the property can vacate, and they cannot access the property any longer. If the lease is to be renewed, the terms should be renegotiated, and at the end of it all the contract can be extended. The terms present in the original agreement are still in place, but the time for the extension will be shorter. When dealing with residential property, the landlord will extend the lease, and some of the terms that will not be altered include the amount of rent to be paid in what is a lease

The lease agreement should contain specific pieces of information. The names of both parties should be present in the agreement. The date of the extension and when the contract comes to an end should also be listed. The earlier agreement should also be referenced. In real estate, the extension is usually granted automatically. The number of years will also be listed in the extension, and the property can be used on a monthly basis.

Why Extend a Lease?

A lease can be extended for the following reasons:

  1. Extending the lease will help to increase the property’s value.
  2. For a short lease, the mortgage lenders can remit funds, which mean the property cannot be sold easily. The buyers who are interested in the property should have cash at hand.
  3. The property that has a short lease cannot be remortgaged easily.
  4. If the lease period has gone down, the cost of the lease will rise.
  5. A lease that is less than 80 years will attract marriage value. If the lease is extended, the freeholder will be eligible for 50 percent of the value that the extension will add to the piece of property.

Who is qualified to extend the lease?

Anyone eligible to become a leaseholder can extend a lease. You are only qualified if:

  1. You have been on the property for two or more years.
  2. The original lease was meant for a team exceeding more than 21 years.

If you meet the above criteria, you can extend the lease and ensure the landlord has given you some attractive terms.

As a leaseholder, you have the following rights:

  • To be issued information regarding the insurance costs.
  • To be presented with the address and name of the freeholder.
  • To learn about how the service charges are being calculated and the amount of capital being spent. Receipts should also be availed upon the request of the person leasing the property.
  • You can join hands with other tenants and get a freehold for the entire block regardless of whether the landlord wants to sell or not.

Should You Extend the Lease?

If the lease does not exceed 90 years, you can renew it. The main issue with a lease that is below 80 years is that it is expensive considering there is the ‘marriage value.’

About Marriage Value

This is a term that describes an increase in the value of the property because of the lease extension. The landlord usually takes 50 percent of the marriage value for a lease that is below 80 years.

Should You Extend the Lease Before Selling?

Whether or not you should extend the lease will depend on how long you can lease and if you want to sell the property soon. Some of these factors should be considered since the new owner will not be able to extend the lease for two years for a lease that does not exceed 80 years. The lease will become expensive in the process, and the value of the property will be affected.

Mortgage-ability

  • For a lease that is below 80 years, the number of lenders will drop significantly.
  • For a lease below 60 years, it will be hard to get a mortgage from any lender.
  • Only a few lenders can issue a mortgage, and their terms will not be as favourable

What happens when scalability is implemented?

  • It will not be easy to sell the property if the buyer is unable to secure a mortgage
  • The buyers will be limited to purchasing the house on a cash-only basis, and only a few will be interested in bargaining.

Should the Lease be extended, or is it Viable to Purchase a Share of the Freehold?

Some laws have been put in place, and they usually allow the leaseholders who qualify to extend the lease. The leaseholders can also come together and acquire the freehold.

If the freeholder is not appealing to you, how you manage the property might be the major issue, or perhaps the charges are high. You will have complete control over everything when you become your freehold.

The eligibility criterion of becoming your freehold is as follows:

  • Two-thirds of the people leasing the property should have leased the property for a prolonged period.
  • At least 50 percent of the flat owners should be leaseholders, and they are interested in purchasing the freehold.

Such decisions should not be taken lightly, and there should be someone who will run the freehold firm while also serving in the capacity of a director.

When Should You Not Extend the Lease?

It is not worth it to extend the lease if there are more than 90 years left unless you are saving a significant amount of the ground rent. Nevertheless, if you don’t have a plan to move and you have grown old, you can leave the issue to the individuals who will inherit your estate. Nonetheless, it is essential to ensure that your entire family has an in-depth understanding of the present implications.

If the leaseholders have agreed to join hands, you should wait for some time since the process will be easier and cheaper. Also, if the extension of the lease is being considered, it can be suspended in an instance whereby the leaseholders have come together to apply for a freehold.

The process of extending the lease takes at least four to 12 months. The main reason why the extension of the lease takes long is because of the following:

  1. You should get valuation advice.
  2. The freeholder should issue a counter-notice.
  3. You are supposed to serve a Section 42 notice.

The freeholder should be accorded at least two months to respond to the Section 42 Notice. Two more months are allowed for the negotiations, and in case both parties fail to reach an agreement, a tribunal can only handle the matter, and it can take at least one year to get solved.

If the lease is about to come to an end, ensure there is enough time, especially if the marriage value is payable or the property is about to be sold.

The cost of extending the lease comes in two parts:

  • Professional fees, taxes, & costs- £2k-£3k.
  • The premium- £5k or more.

 

The Premium

The final figure is dependent on the amount that you have agreed on with the landlord. Also, you are supposed to consider the marriage value, and it is dependent on the value of the property.

Some of the tips to consider include:

  • The online calculators are easy and quick; however, it does not mean they are accurate, and that means you should seek the services of a professional who will handle the valuation.
  • A competent surveyor will issue a ‘best & worst’ case scenario, and they will focus on the perspective of the landlord and the leaseholder. They will also anticipate the counterclaim and claims.
  • Ensure there are negotiations if you are to get an estimate that is reliable.
  • The surveyor is best suited to negotiating the ‘premium’ that should be paid to the freeholder through the solicitors, and that means you are supposed to take time to find one that offers quality services.

The formula used to extend the lease helps to determine the amount of money the freeholder will be paid by the leaseholder when extending the lease. Some of the considerations that are put in place include the fact that the landlord can lose currently and in the future in terms of failure to the losses being compensated.

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