Should I buy a property with a short lease?
This is a question that most of us will (fortunately) never have to ask. However, if you do find yourself considering the purchase of a house or flat with a short lease, what are the risks and potential pitfalls?
Properties affected by a short lease are rare. Most homebuyers will never even view one. Unfortunately, this means that when a buyer does discover their dream property has a short lease, they are often unprepared to deal with the consequences.
What counts as a “short lease”?
Leasehold properties, whether houses or flats, usually have a initial leasehold term of 99 or more years. Some properties will have had a term of 125 years, and others (usually ones that have already had their lease extended) can have terms of as long as 999 years.
In simple terms, a “short lease” is usually a lease than has fewer than 80 years remaining on the lease.
The more detailed answer to “What is a short lease?” has two parts:
- What the law says in theory, and,
- What mortgage lenders call a short lease, in practice
Short leases - What the law says
Historically, short leases were a 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 (the party that owned the freehold of the land on which the leasehold property sat).
The 1993 Act meant that a freeholder could not legally refuse a leaseholder’s request to extend their lease (subject to various conditions, and provided that the correct process was followed).
Calculating the lease extension premium
The Act sets out a process to calculate the amount of money that the leaseholder must pay to the freeholder to extend the lease. This fee is called the premium.
The lease extension premium for a property with only a few years remaining on the lease could be much more expensive that that for a property with 70+ years remaining.
Qualifying for a lease extension
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, this is called a “long lease”. It does not matter how many years are remaining on the lease.
The leaseholder wishing to extend the lease must also have held the lease (owned the property) for at least two years.
Therefore, a qualifying leaseholder can extend their lease at any time, regardless of how “short” the lease is. In practice, the process can take some months to complete, and the premium can be very expensive.
Other leasehold-related Acts include:
- 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 addition rights
What 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.
The Council of Mortgage Lenders (CML) Handbook 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.
The real question should be “Can you buy a property with a short lease?”
If you are buying with a mortgage, the question “Should you buy a house or flat with a short lease?” is usually irrelevant. The vast majority of mortgage lenders will simply not lend on a property with a short lease.
Given that most lenders will not lend on short-lease property, if you have a standard mortgage offer from a high street bank or lender, you may have no choice but to look for another property.
Knowing that most buyers will be buying with a mortgage, and that most lenders require 75-85 years remaining on the lease, estate agents will not usually market short-lease property through the usual channels.
Short leases are more frequently seen at property auctions, or when dealing with probate sales.
Is there nothing a prospective buyer can do?
Just because a property currently has a short lease does not mean that it can’t be extended.
However, it is likely that the current owner is selling precisely because they either:
- can’t afford to extend the lease themselves, or,
- simply don’t want the hassle.
If you really want to buy a certain property with a short lease, you may be able to negotiate with the seller and get them to extend the lease before you buy... if you are willing to wait while the lease extension process completes.
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 Leasehold Valuation Tribunal (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 a 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.
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.
Informal lease extension
It may also be possible to agree 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.
You could buy the freehold instead
Alternatively, the leaseholder could buy the freehold outright. This means the leaseholder would no longer have to pay ground rent and service charges to the freeholder, but it will be a more expensive option than simply extending the lease.
For more information about buying a property, extending your lease, or purchasing the freehold of a property, contact our specialist conveyancing team on 0800 612 0377 or email email@example.com.
Leasehold Reform, Housing and Urban Development Act 1993. Legislation.gov.uk, 1993.
Lease Extension - Getting Started. LEASE (Leasehold Advisory Service).