Can I sell my leasehold property with a short lease?
A short lease will make it harder to sell a leasehold flat. However, there are steps you can take to help the sale, even if you don't want to extend the lease.
What is leasehold?
A lease is essentially a long-term rental agreement. A lease is issued by a freeholder (landlord) for a fixed period - typically between 99 and 999 years. Once the period (lease term) expires, the leaseholder loses the right to use the property and ownership of the lease will revert to the freeholder.
Most flats in England and Wales are leasehold. However, the past few years have seen an increase in the number of leasehold houses.
What qualifies as a short lease?
There is no precise definition of a ‘short lease’.
Once a lease drops below 70 years, then many lenders will not offer a mortgage on the property. Unexpired lease term requirements vary from lender to lender and are published in the UK Lender's Handbook.
At the time of writing, the following excerpts from the Lenders Handbook show the unexpired lease term requirements of the UK's top 5 lenders:
|Lender||Minimum unexpired lease term|
Lloyds Banking Group
|Mortgage term plus 30 years subject to an overall minimum term of 70 years.|
|Nationwide Building Society||55 years or less than 30 years remaining at the end of the mortgage term|
|Royal Bank of Scotland||Mortgage term plus 30 years. For a Lifetime Mortgage, the term must be no less than 150 years minus the age of the Borrower.|
|HSBC||More than 30 years remaining on the lease beyond the term of the mortgage|
|Barclays||Mortgage term plus 25 years provided that leases of less than 85 years are referred for approval|
Generally, a lease with 70 years or less is considered to be short.
Once the lease falls below 80 years, 'marriage value' is applicable. Practically speaking, therefore, if you own a property with 83 or fewer years to run, you should think of it as a short lease and take steps to extend as soon as possible.
An exception might be if you are planning to acquire the freehold at some stage.
Savvy leaseholders tend to start thinking about extending once the unexpired lease term drops below 90 years.
How do I calculate the unexpired lease term on my flat?
To find your unexpired lease term, you will need to obtain a copy of your lease or any subsequent extension thereof.
The ‘Term’ section can usually be found at the beginning of the document and will say something like:
Term: 125 years from 10 September 1999.
Calculate your unexpired lease term
To calculate how long the lease has run so far: deduct the date the lease was granted from today’s date. To calculate the unexpired lease term, deduct this from the lease term.
If you cannot find a copy of your lease, contact your conveyancing solicitor. Alternatively, you can download a copy from the Land Registry for a fee of £4.
A lease is a ‘depreciating asset’, but leases do not depreciate at a linear rate. The typical sale price of a leasehold property only starts to experience material depreciation once it dips below 90 years.
If the lease has less than 80 years to run, a ‘marriage value fee’ will be payable to the freeholder. when extending the lease. This fee is payable for the increase in the value of the property following the lease extension. This increase is called 'marriage value'.
The marriage fee is calculated as 50% of the increase in property value after a lease with fewer than 80 years to run is extended.
What are my options if I want to sell my property with a short lease?
Option 1 - Extend the lease
The Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”) gives you the statutory right to extend your lease by 90 years (in addition to the unexpired term of the lease).
To be eligible to extend your lease:
- the original lease must have been granted for 21 years or more.
- you must have owned the lease for over 2 years.
You can extend your lease:
- Formally by serving a ‘Section 42 Notice’ on the freeholder. This statutory route means that:
- a prescribed lease extension process will be followed.
- an additional 90 years will be added to the lease.
- the ground rent will be reduced to zero (peppercorn).
- Informally - pretty much anything can be agreed with the freeholder, but there are none of the statutory assurances offered by the formal route.
The recommended process for extending your lease is by sending a 'Section 42 Notice' to the freeholder, landlord or both. The notice should include the premium you are willing to pay - based on a valuation obtained from a qualified valuer.
Once you have served the notice, the freehold can accept, negotiate or reject your offer.
Extending the lease before you market your property will make the property more saleable and should add more value to the property than the cost of the extension.
With the lease extended, your property will be:
- easier to sell
- easier to mortgage
- worth more
- subject to a peppercorn rental i.e.no more ground rent payments
However, extending your lease can be:
- a lengthy process, especially if the offer is rejected
- expensive - including the cost of the extension, valuer fees, legal fees etc.
Option 2 - Serve notice on the landlord and assign the right to the buyer
An increasingly common strategy is to initiate the lease extension process, then assign the ongoing right to continue that process to the buyer.
The Section 42 Notice can be served between exchange and completion. The conveyancing solicitor will then draw up a ‘deed of assignment’ between the buyer and seller.
The deed of assignment allows the new owner to continue with the lease extension process without needing to wait until they have owned the lease for 2 years.
This method will:
- help sell the property
- could increase the selling price (not by as much as extending the lease before selling)
- circumvent the need for the buyer to have owned the property for 2 years before being able to extend
Option 3 - Sell the property as is
You could just put the property on the market as is and see what happens.
Depending on how short the lease is, the selling price may be impacted, and the property may be harder to sell. The buyer will almost certainly factor the lease length into any offer. Prospective buyers will also want to factor in the added uncertainty and hassle of extending the lease.
- least hassle option
- no financial outlay required before the sale
- the sale price will be lower than if you extend the lease, or at least start the extension process
Your next step
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Leasehold Reform, Housing and Urban Development Act 1993. Legislation.gov.uk, 1993.
Lease Extension - Getting Started. LEASE (Leasehold Advisory Service).