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£1 billion lease extensions

Flats imageUK flat owners waste tens of thousands of pounds on informal lease extensions every year completely unnecessarily, contributing to a £1 billion windfall for freeholders over a 20 year period, says Louie Burns, Managing Director at Leasehold Solutions.

The leasehold system covers 4.1 million residential flats; leases typically run for 99 or 125 years and need to be extended as the remaining years decrease, to protect the capital value of the property.

A formal lease extension on a typical £230,000 flat would cost the owner around £13,250. In contrast, an average informal lease extension can cost more than £100,000 over 20 years, when costs, legal fees and ground rent increases are taken into account.

Leasehold Solutions estimates that 12,000 informal lease extensions are signed every year, representing a cost of more than £1 billion to leaseholders. Informal agreements offer the flat owner no legal recourse and the freeholder can change the terms of the lease, such as increases to the ground rent and service charges as they wish.

By playing the long game, freeholders can keep on fleecing the leaseholders again and again.

Louie Burns imageLouie Burns (left) said, “Freeholders often claim that an informal lease extension will save the leaseholder money, to dupe them into paying a far higher price for their lease over many years.

“Often freeholders will only extend the lease back up to 99 years, which means the leaseholder must look to extend the lease again within the next 20 years, providing freeholders with another huge windfall. By playing the long game, freeholders can keep fleecing leaseholders again and again.”

Flat owners have a legal right to extend their lease by an additional 90 years and reduce the ground rent to zero if they have owned their flat for more than two years. The law provides compensation to the freeholder when the lease is extended using a calculation based on the ground rent, reversion fee and marriage value (where the freeholder is entitled to half of the increase in the value of the property when a lease with less than 80 years remaining is extended).

However, freeholders often promise flat owners significant savings through informal lease extensions, only to increase ground rent and service charges as a result.

Louie Burns continued, “Every week we hear some pretty shocking stories. I spoke to a flat owner who had taken an informal deal and found he had to pay his freeholder 10 per cent of his monthly rental income in service charges! He and any future owner – if he could ever sell the flat on – are now stuck with this onerous clause forever.”

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