Understanding The Danger Of Short Lease Properties And What To Do About It

Understanding Dangers Of Short Lease Properties
Leasehold property is an interesting and often confusing ownership concept.

You don’t actually buy the building or the land it stands on – that remains the property of the freeholder. That’s the main difference between leasehold and freehold.

So, as a leaseholder, you acquire the right to occupy the property for a set length of time and under certain conditions, as set out in the Lease.

If you are looking to buy a leasehold flat, you should have a clear understanding of what this means in practice.

In particular, the length of the remaining lease at the point of purchase should be a key point of concern. Residential leases are typically assigned for a term of 99 years or 125 years, some can be for 999 years!

However, leasehold property, by definition, is a decreasing asset, and a property with a ‘short’ lease is particularly vulnerable. The good news is that the lease on your flat can be extended, so let’s take a look at how this can be achieved.

The lease materially affects the value of your property

Leasehold value of property

No matter how attractive the property may be, having a short lease will inevitably affect its value. You may think that a 90-year lease is long enough – after all you will surely have left the property by then and it won’t affect you.

This is technically correct, however once the remaining years on the lease have reached 80 years or below, things can take on a new level of complexity.

Below 80 years, the property attracts a ‘marriage value’ which affects how much it will cost you to extend the lease.

The marriage value goes up as the lease goes down, which can make a lease extension prohibitively expensive – it pays to act fast before your lease slips to below 80 years.

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It’s hard to get a mortgage on a short lease property

If you are thinking of buying a short lease property, you may encounter unsurmountable difficulties in obtaining finance. In fact, many lenders will flat out refuse to lend on properties with leases below 70-80 years.

In short, a flat with a short lease is much more difficult to sell.

The increasing loss of value makes it an unattractive proposition for both buyers and mortgage companies. If you are a seller, your market may well be restricted to cash buyers only.

You have a statutory right to extend your lease

Thankfully, you don’t have to be stuck with an inevitable property nightmare looming on the horizon. Under the Leasehold Reform, Housing and Urban Development Act 1993, leasehold owners have the statutory right to a lease extension.

Provided that you have owned the property for a minimum of 2 years, the legislation grants you the opportunity to add 90 years to your current lease while your ground rent will be reduced to nothing.

There’s a set process to follow, and a premium to be paid to the freeholder which can be negotiated. For a quick look at how much your lease extension might cost and what the new value of your flat with an extended lease might be, take a look at this handy calculator.

You need to follow the correct lease extension process

Lease extension

While the benefits to the leaseholder are clearly set out under the terms of the Act, your freeholder may consider these to be unfavourable. As a consequence, they may suggest an exorbitantly high premium to protect their interests.

This is where the expert advice of an experienced property surveyor and solicitor will come in handy. Have a lease extension survey and formal valuation carried out, obtain professional guidance and instruct a specialist to negotiate on your behalf.

That way, you should be able to arrive at a premium that is mutually acceptable.

Your solicitor will serve the Initial Notice (Section 42 Notice) on your landlord which gets the legal process started. The freeholder has 2 months to serve a Counter Notice (Section 45 Notice). Once the premium and lease terms have been agreed, the lease extension will be completed and registered at the Land Registry.

There are alternatives to a statutory lease extension

If you don’t qualify for a statutory lease extension or prefer not to take advantage of your statutory rights, there are other ways. There’s nothing to stop you approaching your freeholder direct, at any point, and asking to extend your lease. 

While he is not obliged to grant you an extension, he may in fact prefer to deal with you outside of the Leasehold Reform legislation.

You may even find that your landlord is willing to offer you a cheaper price for an informal, non-statutory lease extension. While this may sound tempting, do check the suggested terms of this lease extension with a fine toothcomb, and certainly with professional assistance.

Be aware that any voluntary, negotiated lease extension won’t be bound by the Leasehold Reform Act, which may leave you with onerous yet legally binding clauses that work in the freeholder’s favour.

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