Dwell Well > Moving > Should You Buy a Flat with a Short Lease?

Should You Buy a Flat with a Short Lease?

Flats and maisonettes are typically sold on the basis of leasehold ownership. The number of years left to run on the Lease has a direct impact on the value. In other words, the lower the number of years, the lower the value of the property. For financial reasons, it might sound tempting to consider the purchase of a ‘short lease’ flat – but is this a good idea? Let’s take a look at what exactly this could mean.

What constitutes a short lease?

A long residential lease for a flat or maisonette (and even some houses) is typically granted for an initial term of 99 years but can be much longer – 125 years or even 999 years are commonplace. As the years go by, the value of the property decreases. Unless the owner obtains a lease extension (see below), the asset will eventually reach the end of the lease term whereupon ownership reverts to the freeholder. Technically speaking, a leasehold property is a wasting asset.

Any property with less than 80 years left on the Lease is regarded as having a ‘short lease’. This does not constitute a problem per se; short lease properties are freely bought and sold on the open market every day. In fact, in London where a large proportion of the housing stock is leasehold owned and property prices are high, it is not at all unusual to see flats being sold with less than 5 years left to go.

However, as one property expert points out, “leasehold properties with a short unexpired term will have a lower market value, as a result of the reduced lease term. Lenders are wary of issuing mortgages on short lease property.”

How do you extend the lease?

The good news is that it is possible for owners to obtain a lease extension, subject to certain qualifying criteria. Broadly speaking, there are two routes to extending the lease on a property: a statutory lease extension and an informal agreement with the freeholder.

  • Statutory lease extension

The Leasehold Reform, Housing and Urban Development Act 1993 gives property owners the statutory right to a lease extension of 90 years in addition to the existing unexpired lease term. Say there are 75 years left to run, the lease extension would give you a new term of 165 years. It also reduces the ground rent to ‘a peppercorn’ per year (meaning zero) for the duration of the lease.

There are various eligibility criteria in order to qualify for a statutory lease extension. The most important one is that you must have owned the property for at least 2 years, while the original residential lease must have been granted for a minimum of 21 years.

As a buyer of a short lease flat you clearly won’t be able to meet the qualifying ownership criteria, but the seller might. In this case, you are strongly advised to ask for a statutory lease extension to be initiated by the seller as a condition of your purchase, with the benefit being assigned to you on completion of the sale.

  • Informal lease extension

If you don’t meet the eligibility criteria for a statutory lease extension, it’s not the end of the world. There is no legal requirement to follow the statutory process and no reason why you can’t just approach the freeholder directly with an informal request to extend the lease. Leaseholder and freeholder are at liberty to negotiate as they please and any agreement reached will have the full force of the law, once signed by both parties.

However, if you go ahead with an informal lease extension, please be fully aware that you will not benefit from any of the statutory protections afforded by the 1993 Act and you may end up with less than a 90-year extension. In fact, you may have less negotiating power with the landlord who could decide to include other terms that may not be favourable to you, and may even present you with a take-it-or-leave-it offer. It goes without saying that you should seek legal advice before you sign any agreement.

It is worth mentioning that leasehold reforms are afoot. The Leasehold Reform (Ground Rent) Act 2022 came into force earlier this year, putting an end to ground rents for most new long residential leasehold properties in England and Wales. Importantly, ground rents are now also abolished on informal lease extensions. Still in the pipeline are government plans to allow leaseholders to extend their lease up to 999 years.

And if you don’t get a lease extension?

Extending the terms of your lease would seem to be the obvious way to protect the value of your flat. However, there may be situations when it might be beneficial to let the lease run out.

One such scenario might involve older homebuyers who have no one to leave their estate to and therefore no worries about needing to protect the long-term value of their property asset.

Property investors looking for high short-term rental yields may also find short lease flats of great interest. If the flat’s purchase price is a fraction of the rental income that can be achieved over the duration of the remaining lease term, this could represent a savvy investment strategy with an attractive profit margin for risk-tolerant investors.

Is there a problem getting a mortgage?

If you are thinking of investing in a short lease property, you will find out very quickly that it can be difficult to find a mainstream lender who is prepared to help you buy a short lease flat. Every mortgage company has slightly different lending criteria with regard to the minimum unexpired lease term. However, as a rule of thumb, if the remaining lease term drops to below 70-80 years, it will be extremely hard to get a regular residential mortgage.

There are specialist lenders in the market who may offer you a mortgage deal but be prepared for much higher interest rates to cover the lender’s additional risk. Speak to an independent mortgage broker who will be best placed to investigate all available options.

The lack of mortgageability means that short lease properties are often sold by auction rather than through the standard estate agent route. For cash buyers with a keen eye for a good investment opportunity who don’t mind the extra effort and expense involved in obtaining a lease extension post-purchase, buying a short lease property may be a great option.

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