Properties with less than 80 years to run on a lease are difficult to obtain a mortgage on, warn estate agents.
The demand for sheltered housing is likely to grow in the future, according to property specialist Denhan Guaranteed Rent, which points out there are about around 1.25 million people over 60 living in London.
Life expectancy in the UK for girls born in 2014/15 is currently 82.9 years and 79.3 for boys born in the same year, the latest Office for National Statistics reveal.
Sheltered housing schemes are a wise investment for many owners because they provide on-site personal care, daily meals and 24-hour emergency assistance.
But if you have an elderly relative who has sold the family home and bought a property that is part of a sheltered housing scheme, leasehold enfranchisement specialist and Belgravia estate agent Best Gapp warns that the value of the property could fall dramatically unless action is taken to extend its lease.
The majority of flats in the UK – including those sold as part of a retirement home scheme – are owned on a fixed-term leasehold.
While the majority of leaseholds issued are for between 99 and 999 years, Wimbledon Village estate agent Robert Holmes & Co says if a leasehold property owner fails to negotiate a new deal – commonly known as a leasehold extension – before the term comes to an end, the ownership of the property will fall into the hands of the freeholder.
The 1993 Leasehold Reform, Housing and Urban Development Act is a leasehold property owner’s most powerful weapon. It gives them the right to increase the value of their property by negotiating a longer lease.
This becomes more urgent when the term falls below 80 years because this is the point a leasehold property’s devaluation can accelerate significantly, says London Bridge estate agent Williams Lynch.
The procedure starts by serving a Tenant’s Notice on the landlord. But beware, this can only be done if the applicant has owned the property for the preceding two years.
It is also worth noting that the preparation of the Tenant’s Notice is crucial because the applicant is liable for the landlord’s reasonable costs from the date the notice is received.
While an application to negotiate a new lease can be time-consuming, here’s why it is financially prudent.
It’s easier to sell a property
It is harder for tenants to sell properties that have leases under 80 years because the majority of mortgage providers will not issue loans on properties with leases under that length of time.
Many mortgage lenders won’t approve home loans on flats with less than 70 years left to run on the lease. Just a few years ago, the minimum term remaining on the lease required to qualify for a mortgage was nearer 55 years. This shift in lending criteria has left many flats unmortgageable.
But your need to sell with an extended lease gives a significant negotiating advantage to the freeholder, who could demand an increased price if you want to extend your lease quickly rather than risk the inevitable delay of a formal lease extension application and risk even further delay involved in a trip to the First-Tier Property Tribunal (previously known as the Leasehold Valuation Tribunal).
The good news, however, is that the lease extension process can be initiated by the owner of the flat before putting it on the market.
No ground rent is payable
As part of the statutory process of lease extension, the ground rent payable to the freeholder will be reduced to a peppercorn rent.
In effect, leaseholders will no longer need to pay significant sums in ground rent.
The alternative to negotiating a new lease
Leasehold, or collective, enfranchisement is the process by which tenants come together and jointly buy the freehold of their block.
This results in them not only becoming their own landlords, but also becoming the joint landlords for those flat owners who didn’t join in with the enfranchisement.
Lease enfranchisement allows those participating to grant themselves a new 999-year lease. But while lease extension only requires the involvement of the flat owner, collective enfranchisement needs at least half of all the tenants of qualifying flats to take part in the process.
Extending a lease on a retirement flat can be a complex business so professional advisers including valuers and solicitors should always be instructed by retirees to assist with a lease extension.