Opinion: When is the best time to extend the lease on my flat?
This month commemorates the 10th anniversary of the collapse of Lehman Brothers investment bank and the start of the worst crisis in the international financial system since the Great Depression.
I bring this up because, after 10 years of austerity, you’d have thought that property prices in London would have taken a battering, but it just isn’t so. If we take the whole of London, from 2008 the average London flat cost £250,460. By 2018, it had risen to £426,731, up 70.37 per cent.
So if the lease on your flat needs extending, and you’re worried that Brexit uncertainties might drive down London flat prices, I’d say the chances of this happening were vanishingly slim.
The fact is London – as a ‘world city’ – is a desirable place to buy properties, including as investments, and desirability drives rising values, irrespective of economic conditions.
Let’s look at the figures. If your average London flat had 70 years unexpired on its lease in 2008 you might have expected to pay the premium value in the region of £14,000 to extend it for a further 90 years with all ground rents reduced to a peppercorn.
Scroll forwards to 2018, if your flat had 70 years unexpired with all other variables being the same as 2008 this premium value would have increased to £24,000.
However, your lease of 70 years in 2008 would now have 60 years to run in 2018, making the premium payable to be in the likely region of £46,000; all other variables remaining the same. You can see how by not renewing earlier you are paying much more.
Yes, rising property prices may well increase the premium you pay for your lease extension. However, a fall in prices does not usually confer the same benefits. Let’s say you waited five years for flat prices to fall. Even if purchase prices fell, any reduction in premium would be outweighed by the fact that your lease is five years shorter than it was before, reducing your flat’s resale value.
Also consider that there are other penalties that arise from not renewing a lease in good time. In the worst case, your flat may become unmortgagable because many lenders require either at least 80 years unexpired or at least 50 years unexpired at the end of the mortgage term.
Your freeholder might also push you to sign a new lease with an onerous new ground rent which might start at a fairly nominal £200 per annum but then doubles every 10 years. There might be other onerous clauses inserted by your freeholder as part of a new lease, which is why you must obtain professional advice before you sign it. It could affect the saleability of your flat otherwise.
There’s no time like the present to extend your lease even if you think flat prices might fall. History suggests this is unlikely, whereas an earlier renewal is far more likely to cost much less than waiting for your lease to have under 80 years left to run. Eighty years is the crucial cut off point, after which marriage value is payable and costs will increase dramatically.
Scrivener Tibbatts is a Wimbledon-based chartered surveyors practice