Lease extensions - the Devil is in the detail

Professional advisers have, quite rightly, in the past suggested that if you live in a leasehold property it makes sense to consider applying to lengthen the term of your lease. With property prices having recently fallen the cost of doing this has also reduced so there is every reason to consider such action as a "good investment" for the future.

If you live in a house or maisonette it may be possible to purchase the freehold but as Derek Cook from Sydney Mitchell Solicitors explains, there are potential problems as regards lease extensions.

"The problem is this," says Derek. "When all negotiations have been concluded you will have a new lease for the extended term of years. It is increasingly apparent that on occasions the freeholder, the person granting the new lease, will accept a relatively small payment, known as a premium, for granting the new lease."

"However, in some cases the new lease may contain a clause giving rise to a rent review after a number of years, which isn't always noticed. This clause is worded so that, say, after 15/20 years the ground rent will reflect the current market rental value of the property at that time. One case in particular saw the ground rent rose from £40.00 p.a. to £2,100.00 p.a."

"This sort of huge increase has several knock-on effects," says Tony Brunt of Anthony Brunt & Co Valuers. "Prospective purchasers may be put off from buying the property especially if there are several rent reviews during the term of the lease. In the case referred to above this made the property unsaleable, so the owner decided to purchase the freehold. Because the ground rent had increased then so had the cost of buying the freehold by more than 100%, from about £10,000 to over £20,000."

"Although lease extensions are still a good investment, extreme care must be taken to examine closely the terms of the new lease," says Derek. "Make sure that you are made fully aware of the implications of any clause leading to the review of the ground rent at a future date or dates. It is possible for the inclusion of such a clause not only to bring financial hardship in paying an inflated ground rent but also it may result in the property being unsaleable without buying the freehold interest at increased cost."

It has also been reported that in some leases the fee on giving a notice of assignment can run into hundreds of pounds. Normally it is about £50/£75 but in new leases it is linked to the value of the property, therefore giving rise to the inflated figure.

The advice is to read very carefully before signing.