Buying a flat with a short lease

Niki Adkins, Head of our growing Leasehold Property Team, details the process of buying a flat with a short lease. She goes on to discuss whether short lease property is worth purchasing, weighing up the pros and cons.

Niki has also written about selling a flat with a short lease, which you can read about here.

What is a short lease?

Regardless of whether your flat is in a purpose-built block or a converted house, it will more than likely be leasehold. This means that you have a right to occupy the flat for however long the lease is for (known as ‘the term’).  

So if the lease term has 85 years left on it, this is how long you can occupy the flat for.  The lease term, as the years go by, will shorten.

Does a short lease devalue a property?

As the lease gets shorter it reduces in value and becomes less attractive to mortgage lenders.

Different banks and building societies have different lending criteria regarding what lease term they consider acceptable.

Can you buy a flat with a short lease?

If you are a cash buyer, you can; but beware! If a lease gets all the way down to zero days, you would have to hand the flat back to the freeholder and simply walk away from your investment.  As such, the value of the flat depreciates as the lease gets shorter.

Can you get a mortgage on a property with a short lease?

Due to the decreasing value of a lease and the fact that you would ‘give up’ the flat at the end of the term, mortgage lenders are picky about what type of lease they will lend against. Most mortgage lenders don’t like leases with terms either approaching the 80 year mark, or where it is already below the 80 year mark.

Lenders are also reluctant to lend against a lease that contains a higher ground rent (sometimes anything over £250) or one that contains certain increasing provisions.

What is marriage value?

When a lease drops below 80 years, an additional form of compensation becomes payable to the freeholder as part of the price payable for a lease extension. This is known as ‘marriage value’. This marriage value will continue to increase sharply as the lease gets ever shorter.

This ‘marriage value’ is the reason the 80-year mark is so important for mortgage lenders – and leaseholders!

Is it worth buying a flat with a short lease?

As suggested above, when thinking about purchasing a leasehold flat, you must carefully consider the number of years left on the lease and the ground rent payments required in the lease. There are two reasons for this:

1. Your mortgage lender (if you are not a cash buyer) will require a certain number of years to remain on the lease and will only lend if the ground rent is ‘reasonable’; and
2. The property you are investing in is an asset – an asset with a short lease and a nasty ground rent is worth much less to future buyers (and their mortgage lenders) so a ‘lease extension’ is something you must consider as a potential cost during your ownership of the property. A buyer is likely to use a shorter lease and/or a nasty ground rent as a negotiation tool to reduce the sale price of the property.  The worst case-scenario is that you could be stuck with a property that you can’t sell without buying a lease extension beforehand.

The main point to remember is that a leasehold property is a depreciating asset.

Another problem is, as the lease gets shorter, it becomes more expensive to buy a lease extension.  Therefore, it is always advisable to extend a lease sooner rather than later.

Can a lease be extended at the point that I purchase?

This depends entirely on the individual circumstances of the property, the seller and the freeholder of the building, so there is no single answer.

There are often two possible routes to extend a lease :-

1. The seller initiates a ‘Statutory’ lease extension (if they have owned the flat for more tan 2 years) and then assigns the benefit of that process to you, as buyer.  This, however, means that the lease extension process won’t be finalised until after you have bought the flat; or
2. It may be possible for your seller to agree and complete an ‘Informal’ lease extension with the freeholder either before you exchange contracts or simultaneously with completion of your purchase; thereby dealing with the matter in its entirety before you purchase the flat.

You can read more about statutory and non-statutory procedure for lease extension here.

How much does it cost to extend a short lease

As a firm of lawyers, we cannot advise in relation to the premium (price) that is payable for a lease extension.  Where appropriate, we can put you in contact with a suitably experienced specialist valuer. They will advise you of the likely premium to be payable for the lease extension. You can get in contact with one of our solicitors here.

Who pays for a lease extension, buyer or seller?

If the statutory route is followed, you will end up paying for the lease extension after you have bought the flat, as you are taking an ‘assignment’ of the lease extension process from the seller.  As a result, this expense would usually be reflected in a lower sale price.

However, if the informal route is followed, the cost of the lease extension is entirely up for negotiation with the seller.  It would be usual for the seller to pay for the extension, but for them to recoup their expense via the sale price of the flat i.e. because they would sell the flat for full market value.

Leasehold specialist solicitors 

Our specialist Leasehold Property Team is one of the largest in the region and are happy to discuss any queries that this article may have raised.

Please call 01202 499255 and a member of the team will be happy to chat about your situation and your specific requirements.

We offer all new clients a free initial chat with one of our bright, knowledgeable lawyers.