Please Note: This Article is 5 years old. This increases the likelihood that some or all of it's content is now outdated.

A one-bedroom Knightsbridge property with just one year remaining on its lease has just been sold for an amazing £550,000.

The 90 year lease on the property owned by the Wellcome Trust had just one year left to go before it went to zero when the leasehold owner died.

Initial offers were in the region of £150,000 but these began to rise significantly before the sale was agreed, leaving the new leaseholder trying to negotiate a new long lease, which could add around £2million to the eventual cost.

At just over 1,000 sq. ft., the flat consists of a large living room with a balcony, a bathroom, kitchen and a double bedroom.

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The estate agent Nicholas Spencer for Henry & James had said this was a fascinating sale and a very rare one for a flat, which would typically sell for around £3million.

The unusual sale and long lease length that had run down to its final year had resulted from the unexpected death of the leaseholder and the looming right of the freeholder to serve notice for possession.

Owners of flats and apartments in England and Wales, and particularly in London, are almost certain to be long-leaseholders rather than full owners (freeholders) of their properties.

Due to the vagaries and long history of the English legal system, British long-leaseholds are virtually unique in the world with their origins dating back more than 1,000 years.

Leasehold property law is a bit of a minefield for the unwary and unsuspecting leasehold purchaser, coupled with all the issues surrounding flat lease ownership: managing agents, management companies, management committees, freehold interests, ground rents, service charges, maintenance and repairs, right to manage, freehold purchase, collective enfranchisement and lease extensions.

Despite legal revisions and changes to statutory rules to protect leaseholders, leasehold is probably no easier to understand today than at any time in its history.

Leases typically start at 99 or 125 years and as the lease length diminished the leaseholders value in the lease does the same.

Any flat with a lease length of less than 80 years becomes progressively difficult to sell as mortgage companies do not like to lend on leaseholds below this length.

Also, when the lease length drops below 80 years the freeholder is entitled to “marriage value”. This is the calculated as amount the sale value of the flat will increase once the lease has been extended.

So any property owner with an unexpired term of just above 80 years should act without delay to avoid paying a marriage value.

50% of this “marriage value” has to be paid to the freeholder along with a premium when the lease is extended as a form of compensation – it’s the freeholder’s share of the increase in value of the flat with a longer lease.

The process of lease extension can take some time through the legal process and the leaseholder must pay all the landlord’s (freeholder’s) valuation and legal costs.

Leaseholders have a legal right to extend after two years of ownership, unless they have done this when they purchased, which is often the best way to do it. The process will add 90 years to the existing lease length and one advantage is that the original ground rent will be reduced to a peppercorn, or nominal annual amount.

If 50% of the flats’ leaseholders in the block agree and club together they can in theory purchase the freehold from the freeholder, known as collective enfranchisement. This means that the flat owners become responsible for the management through a company set-up to do this, but that’s another complicated story.

Extending the lease is very much in the leaseholder’s interest and the sooner it’s done as they lease length approaches 80 years the better. Otherwise the marriage value contribution will sky-rocket as the lease length approaches zero, as in the case of this story. The key criteria for costs of extension include:

– The present value of the landlord’s right to receive the existing ground rent until the end of the lease term
– The present value of the landlord’s reversion, which means the value of the property with vacant possession if theoretically the lease had run to zero.

An example might be a flat with a 99-year lease from 1985 with an annual ground rent payable of £100 and a market value of £450,000, which gives an unexpired term of 70 years.

The lease premium might be in the region of £12,000 and allowing for the marriage value contribution this would bring the total cost excluding legal fees to around £30,000.

This may seem a lot of money to the leaseholder at the time, but it’s going to be considerably more in the future as the market value of the property increases and the lease length goes less year by year.

Please Note: This Article is 5 years old. This increases the likelihood that some or all of it's content is now outdated.

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