Can I sell my leasehold-property with a short lease?
Should you try to sell your property if it is subject to a short lease? If not, what are the alternatives?
What is a lease?
When you buy a leasehold property, you are buying the right to live in the property for the term of the lease. Think of it as a long term rental agreement.
During the term of the lease, the leaseholder has the right to occupy the property, but never actually owns it or land on which it is built.
Leasehold usually relates to flats, but there is an increasing (and controversial trend) for new build houses to be sold as leasehold.
What is a short lease?
There is no exact definition of a ‘short lease’.
Leases are initially granted for a typical period of 99, 125 or even 999 years. Sometimes a lease may be for a shorter period (e.g. 50 years) but this is uncommon.
A lease is a ‘depreciating asset’ but leases do not depreciate at a linear rate. The typical sale price of a residential 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.
Once a lease drops to around 70 years or less (varies from lender to lender see: CML Handbook), then most lenders will not be prepared to offer a mortgage on the property.
Generally speaking, a lease with 70 years or less is considered to be short.
Practically speaking, 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 - assuming you are financially able to do so.
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 find my unexpired lease term?
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 the unexpired lease term, deduct this from the 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.
Your options if planning to selling a property with a short lease:
If you have a short lease and are planning to sell, you have the following choices:
Extend the lease
The Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”) affords lessees the statutory right to extend their lease by 90 years (in addition to the unexpired term of the lease) at a ‘peppercorn rental’ by serving a 'Section 42 Notice' on their landlord.
A Section 42 notice is the document that a leaseholder sends to a freeholder advising of the amount (premium) the freeholder is willing to pay to extend the lease.
To be able to extend:
- the original lease must have been granted for 21 years or more
- the leaseholder must have owned the lease for over 2 years
You can approach your freeholder either:
- 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
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 to value to the property than the cost of the extension.
- the property easier to sell
- the property will be easier to mortgage
- properties with longer leases are more valuable so you should be able to sell for more
- peppercorn rental means no more ground rent payments
- can be a lengthy process, especially if the offer is rejected
- expensive - the cost of the extension, valuer fees, legal fees etc all mount up
- the seller may not have the money
Serve notice on the landlord and assign the benefit 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 draws 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.
Buyers - If you are buying a property with 83 or fewer years to run on the lease, you should ask your seller if they are prepared to serve notice to extend on their freeholder before completion. If they are not you should obtain an estimate of the probable cost of extension (with marriage value) and ensure that you are still happy to buy the property for the agreed amount.
- improves the 'saleability' of the property
- could increase selling price
- buyer does not have to have owned the property for 2 years before being able to extend
- won’t increase selling price as much as extending the lease before selling
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 in to the offer price. Prospective buyers will also want to factor in the added uncertainty and hassle of extending the lease.
- least hassle route
- no financial outlay required before the sale
- the sale price will be lower than if you extend, or at least start the extension process
Leasehold Reform, Housing and Urban Development Act 1993. Legislation.gov.uk, 1993.
Lease Extension - Getting Started. LEASE (Leasehold Advisory Service).