- Leasehold dwellings make up 20% of English housing stock
- A lease extension can cost tens of thousands of pounds, depending on the property value
- When a lease falls below 79 years, costs triple
Properties are either freehold or leasehold. If your property is freehold, you own the building and the land. If your property is leasehold, you own the property but not the building or the land it’s on. In 2021-2022, around 20% of the English housing stock was leasehold dwellings.
What Does Leasehold Mean When Buying a Flat?
Leasehold flats can have a lease of 99 to 999 years, and you have the right to occupy the property for the duration of your lease. However, when the lease is short, typically under 80 years, problems start to arise. The cost of lease extension increases, mortgages may be more challenging to obtain, and it can be harder to sell in the future.
Short-lease properties for sale might appear to be a great deal, often with a lower premium. However, with lease extensions costing thousands of pounds, costs may outweigh that great deal. It pays to explore your options when it comes to short lease flats.
What’s a short lease?
A short lease is below 80 years. If a property has a lease of 100 years, you’ll need to factor in how the flat may decrease in value when you come to sell. If the short-lease flat is an investment to rent out, you may own it for well over 20 years.
The problem with a short lease
Buying a short lease flat presents a few significant problems.
Extra expense
You can pay for a lease extension. However, this can be tens of thousands of pounds, depending on the property's value. Once the lease falls below 80 years, the landlord will receive 50% of the profits from renewing the lease. For example, if the property will gain an additional £30,000 in value from the lease extension, the landlord will receive £15,000. Leaseholders will also have to pay legal costs for themselves and the freeholder, adding further expense.
Mortgage issues
If you require a mortgage, many lenders won’t lend on flats with a lease below 80 years. If a lender does release funds for an 80-year lease, the remortgage rate might be considerably higher. Prospective future buyers may struggle to get a mortgage on a short lease flat, limiting the sale to cash-only buyers.
Careful planning
Extending a lease on a flat when over 80 years are remaining is much cheaper than extending a lease with 79 years remaining, which can be close to triple the cost. The freeholder has no obligation to extend the lease before the sale, either. As the buyer, you have no legal right to extend the lease until you have lived in the flat for two years.
Delays
If you need to move or buy the property quickly, beware that a lease extension could likely add months to the buying process.
Limited buyers
When the lease is very short, the property may linger on the market longer as it limits the buying pool to cash-only buyers.
Short Lease and Property value
Buyers might consider how much they’d pay if the property had a long lease. They will then understand the costs involved in the lease extension and deduct it from the asking price. This is a reasonable way to ask for a reduction.
How to extend the lease
Legally, the leaseholder can apply to extend their lease, and the freeholder can’t refuse. However, you must consider the costs and hassle of extending the lease.
One option is to give the seller the option to extend the lease before you buy the property, requiring the seller to pay for the lease extension. They can use the purchase funds if they don’t have the money. This is called “new lease on competition.” With this option, when you or your tenants move in, the lease will be resolved. However, if it’s a competitive market with many prospective buyers who don’t mind buying a flat with a short lease, you may lose out as it’s unlikely to be the vendor's preference.
A new lease on completion can take up to a year to complete. There’s the option to speed things up with an informal lease extension. However, your legal team must review everything before making any agreements.
Another option is to ask the seller to start the lengthy lease extension process and transfer it to you when you complete the sale. This does come with potential problems. Firstly, you’re still buying a short lease flat, and secondly, there is plenty of uncertainty with lease extensions that will become your problem.
Remember, sellers are unlikely to be interested in the flat they’ve sold in the future. With your professional advisors, you must ensure the process is transferred and negotiated before or on completion.
How to Extend the Lease If You Want to Complete It Quickly
Once you’ve owned the flat for two years, you can ask for an extension. This can be a long process. Once served the Section 42 notice lease extension, the freeholder has two months to respond. Following their response, there will be a two-month negotiation period. If they don’t reach an agreement, there may be cause for a Leasehold Valuation Tribunal to extend the timeline. You need to save money to pay for the lease extension, too.
Are properties with a short lease a good investment?
A short-lease flat will likely come with a reduced price or the chance to negotiate. However, the costs of extending the lease, the time it takes, and the uncertainty might be off-putting.
The lease cost depends on the property's value, so if the flat is in a premium location and has a short lease, expect high costs for a lease extension.
While you don’t need to avoid flats with a short lease, a flat with a long lease might be a better option if you're looking for a seamless and stress-free investment. For more information on selling or buying short lease flats, contact our Central London estate agents.
