Purchasing a flat with a short lease - extending the lease as part of the process

When purchasing a leasehold flat you must think carefully about the number of years left on the lease and the ground rent risks you may expose yourself to. There are two reasons for this: 

1. Your mortgage lender is likely to 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 so it 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 80 year problem

The main point to remember is that a leasehold property is a depreciating asset. As a lease gets shorter, it decreases in value i.e. the flat becomes less valuable.

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

Marriage value

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

Ground rent

Lenders have become particularly adverse to increasing or unreasonable ground rents and some are beginning to refuse to lend on some ground rent increases that were previously acceptable to them.

Lease extension

Niki Adkins is an associate and a leasehold specialist.

Niki says “If you are considering purchasing a lease approaching the 80 year mark or which has already dropped below 80 years, it is essential for you to investigate a lease extension. In fact, most mortgage lenders may require an extension to be obtained before they will lend against the property. Also remember that, if you don’t arrange an extension straight away, it is likely that you will need to do so before you can sell the property in the future. Lenders’ requirements are changing week-on-week and so it is imperative that you obtain specialist advice in relation to the terms of a lease”.

Points to consider as a potential buyer of a property with a short lease

There are two possible routes to take in extending a lease.

1. The seller initiating a Statutory lease extension and assigning the benefit of that process to you, as buyer (provided the seller has owned the property for two years); or 
2. It may be possible for your seller to agree and complete an Informal lease extension with the freeholder before you exchange contracts; thereby dealing with the matter in its entirety before you purchase the flat.

Statutory lease extension considerations

• The terms are fixed i.e. an additional 90 years at a peppercorn ground rent – therefore, the freeholder cannot offer you unfavourable terms; 
• If the price payable for your lease extension cannot be agreed with the freeholder, you can apply to the First-tier Property Tribunal for a determination of the fair price payable; 
• The freeholder is forced to complete and cannot withdraw – it therefore does not matter if you are aware of the type of freeholder they are; 
• Your seller can serve the Statutory Notice on your behalf if they can assign the benefit of their two year (or more) ownership to you. You can then continue the lease extension process once the purchase is complete; 
• You would agree a reduced price for the flat in consideration of the cost of the lease extension.

Informal lease extension considerations

• The freeholder could offer unfavourable terms as they are not fixed (e.g. a short extension but with an unreasonable increasing ground rent);
• There is no assistance from the First-tier Tribunal;
• The freeholder could withdraw from the transaction at any time. Crucially, if you have already purchased the property at that point, you would have to wait two years to serve your own Statutory Notice, by which time the lease is two years shorter and “two years more expensive” to extend;
• You are unlikely to know how reliable the freeholder is at this stage;
• Provided the extension is completed before you purchase the property, you would pay the full value for the property.

Niki concludes “There is a lot to consider. We are very happy to discuss the pro’s and con’s of your situation and the property and guide you through the process. We frequently deal with lease extensions as part of a conveyance and clients find it beneficial for us to be able to handle both aspects seamlessly with our colleagues in the Conveyancing Team here at Frettens. Please do get in touch if we can help you.”

Download more information

We have a number of fact sheets and guides on this process available from our Lease Extensions page.

Our Leasehold Extension Team, based in Christchurch, also cover all areas of the country as the work can be done complete remotely. If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 and we will be happy to chat about your situation and you particular requirements.