Should I buy a property with a short lease?
If want to buy a flat with a short lease, what are the risks? What are the cost implications? What will your rights be? What is the Section 42 loophole?
Short lease properties are rare
Properties affected by a short lease are rare and most homebuyers will never come across one. The rarity of short lease properties means that buyers are often unfamiliar with the concept. The buyer may not even be made aware of the short lease until the conveyancing process is well underway.
What counts as a “short lease”?
Leasehold properties usually have an initial leasehold term of 99 or more years. Some property developers have sold new build homes with initial lease terms as high as 999 years.
Unless the lease is extended, ownership of the property will revert to the freeholder when the lease term expires. ( The freeholder is the party that owns the freehold land on which the leasehold property is built.)
A “short lease” is generally regarded as a lease with fewer than 80 years remaining.
What does the law say about short leases?
Historically, short leases were a ticking timebomb for leaseholders. Once the lease expired, ownership of the house or flat would revert to the property’s freeholder. The leaseholder would be left with nothing.
The Leasehold Reform Housing & Urban Development Act 1993 gave leasehold property owners the statutory right to extend their lease.
Prior to the Act, owners could only extend their lease if the freeholder agreed.
Since the Act was introduced, subject to certain conditions, freeholders can not legally refuse a leaseholder’s request to extend their lease.
Other leasehold-related legislation includes:
- The Leasehold Reform Act 1967, which granted leaseholders the right to buy the freehold.
- Commonhold and Leasehold Reform Act 2002, which simplified the process and gave leaseholders additional rights.
Qualifying for the right to extend a lease
To qualify for a lease extension under the Act, the original lease term for the property must have been for at least 21 years. Confusingly, any lease with an initial term of 21 years or more is called a “long lease”. It does not matter how many years are remaining on the lease - only that the initial term was for 21 years or more.
The leaseholder must also have held the lease (owned the property) for at least 2 years.
A qualifying leaseholder can extend their lease at any time, regardless of how “short” the remaining lease is.
How much does it cost to extend a lease?
Unfortunately, there is no straightforward answer to this question. The cost of extending a lease will be comprised of:
The premium paid to the freeholder
The Act sets out a process for calculating the fee that the leaseholder must pay to the freeholder to extend the lease. This fee is called the 'premium'.
The cost of the premium will ultimately be a negotiation between the leaseholder and freeholder. The calculation will take into account:
- The amount that the current market value of the freeholder's interest in the property is reduced as a result of the leaseholder extending the lease
- The 'Marriage Value'
- Any losses that the freeholder will incur as a result of the lease extension
Marriage value is the increase in a property's value resulting from the lease extension. Under the Act, the freeholder is entitled to 50% of the increase in the value of the property when a < 80-year lease is extended. Leaseholders are usually advised to start the lease extension process when they have 85 years remaining.
The following example illustrates how marriage value would be calculated:
Value of property with long remaining lease (e.g. 99 years) = £350,000
Value of property with short remaining lease (e.g. 50 years) = £270,000
Marriage value payable to the freeholder = 50% of (£350,000 - £270,000) = £40,000
An independent surveyor will carry out a premium valuation and this calculation would be used to begin negotiations with the freeholder.
Professional legal and survey fees
In addition to the premium, the leaseholder will need to pay their own and the freeholder's legal fees and valuation costs.
You should budget in the region of £2,000 and £3,000 for professional fees.
What do mortgage lenders consider a “short lease” to be?
Lenders refer to the years remaining on a lease as the “minimum expired lease term”. The shortest lease term that different lenders will accept varies from lender to lender.
The 'UK Finance Mortgage Lenders' Handbook for Conveyancers' sets out each mortgage lender’s minimum term. Some banks and lenders calculate the term from the date the mortgage is granted, others from the completion of the mortgage.
The majority of lenders consider a “short lease” to be a lease with fewer than 75 to 85 years remaining.
At the time of writing, the top ten UK Mortgage Lenders (by Gross Lending) published* the following requirements:
|Lender||Minimum unexpired lease term accepted|
|Lloyds||Mortgage term plus 30 years subject to an overall minimum term of 70 years.|
|Nationwide||55 years but there must be at least 30 years remaining at the end of the mortgage term (regardless of the length of lease at the start).|
|RBS||Mortgage term plus 30 years.|
|Santander||Mortgage term plus 50 years.|
|Barclays||Mortgage term plus 25 years provided but leases of less than 85 years must seek approval.|
|HSBC||More than 30 years remaining on the lease beyond the term of the mortgage at the outset.|
|Coventry BS||A minimum of 70 years unexpired lease at completion|
|Virgin Money||85 years at the time of completion.|
|Yorkshire BS||85 years from the date of completion of the mortgage.|
|TSB||Minimum of 70 years at mortgage commencement, with 30 years remaining at mortgage redemption.|
What are the options?
Given the difficulties of obtaining a mortgage, most short lease properties are often sold through auctions rather than estate agents. If you do discover that a property you want to buy has a short lease, short of puling out you have the following options:
Speak to a different lender
As shown in the table above, requirements vary considerably between lenders. Depending on the unexpired lease term of the property you want to buy, you could approach a different lender or consider a shorter mortgage term
Get the seller to extend the lease
One proactive solution would be to get the seller to extend the lease before completion. As a new owner, you won't qualify to extend until you have owned the property for 2 years.
However, many sellers put their homes on the market as they cannot afford to extend the lease, so you could offer to increase your offer to cover the cost of the extension.
How long does a lease extension take?
It really all depends on the relationship between the leaseholder and the freeholder:
- If the freeholder and leaseholder are pragmatic and can agree on a reasonable premium for a reasonable extension, the process can take around 2 to 3 months.
- If the freeholder and leaseholder are on good terms, it may be possible to complete the whole process much faster.
- If the freeholder is absent, or informal agreement cannot be reached, it may be necessary to take the matter to a the First -tier Tribunal (FTT, formerly the Leasehold Valuation Tribunal or LVT) to determine what a reasonable premium should be. This process can take over a year to complete in some cases.
Can I extend a short lease after I buy the property?
Under the 1993 Act, you must have owned a leasehold property for two years before you inherit the legal right to extend the lease. This means you cannot use the formal, statutory process to extend your lease immediately after purchasing a property.
However, the seller can start the process themselves, by serving a "Section 42" notice.
What is the Section 42 loophole?
One "loophole" around the two-year restriction would be for the seller to start the formal lease extension process. The seller can then assign the ongoing right to continue that process to the buyer.
This enables the buyer to "inherit" the seller's right to extend the lease.
The seller starts the process by serving a Section 42 Notice between exchange and completion. The seller's conveyancing solicitor will then draws up a "deed of assignment" between the buyer and seller.
The buyer then continues the lease extension process until it completes, usually 2-3 months after they have bought the property.
Could I agree an informal lease extension?
It may also be possible to agree on an extension with the freeholder on an entirely informal basis after you buy the property.
In an informal negotiation, you would have no statutory support. You could end up spending money on surveyors’ fees and legal fees, only for the negotiation to fall apart as no agreement is reached. You could then be £1,000s out of pocket, with nothing to show for it.
So, should I buy a property with a short lease?
If you are a cash buyer or have found a suitable qualifying mortgage, then the simple answer is “It depends on the price.”
Sooner or later, a property with a short lease will require a lease extension. The cost of paying the “premium” to the freeholder to extend the lease should be factored into the price of the property when you buy it.
Including lawyers’ and surveyors’ fees, the cost to extend a lease can run into £10,000s for properties with only 60 to 70 years remaining on the lease. If you have fewer than 60 years remaining, the cost can be much higher.
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