Buying a property with a short lease: what you need to know

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26/10/2015
Research has revealed there is widespread ignorance among homeowners over the length of their leases, and the significance of the ‘80-year rule’.

Law firm Bolt Burdon Kemp has branded this lack of understanding “a ticking time bomb”.

Almost all flats and apartments are leasehold properties, but buying a leasehold can be fraught with issues, and a failure to renew a lease can create a number of expensive problems for homeowners.

The 80-year rule

The 80-year rule means a lease with less than 80 years left steadily becomes less valuable, leaving the property owner with a diminishing asset they may be unable to sell or mortgage.

The cost of extending or buying the freehold increases significantly once a lease has fewer than 80 years on it. Once a lease has less than 55 years on it, it is “pretty much impossible” to get a mortgage from a high street lender if you want a 25-year mortgage, notes Stephen Hill, partner at Bolt Burdon Kemp.

This online calculator helps homeowners see how much the costs of a lease extension increase over time, and the points at which problems start to arise.

‘Short’ leases

Homeowners should also address leases which have 82 years left on them.

A leaseholder only acquires the statutory right to extend their lease once they have been the registered owner with the Land Registry for two years.

Therefore, if you are buying a lease with 82 years left to run, Hill recommends requesting the formal right to extend the lease from the seller. For this to be successful, the seller themselves must have (or acquire) the right to extend the lease.

“This is done by the seller starting the lease extension process, by serving the Statutory ‘Section 42 Notice’ on the landlord, and assigning the notice to the buyer – a tricky process and one that solicitors often mess up,” says Hill.

“As a general rule, any lease approaching 80 years should be extended before the date passes.”

Owning a share of a freehold

There are a number of reasons why owning a share of a freehold flat is preferable to being a leaseholder. Leaseholders can be vulnerable to landlords as they may be charged sizeable fees for the upkeep of communal areas of the building (e.g. roof, walls, stairs and hallway). Landlords can also block the sale of leasehold flats.

However, buying a freehold share can be expensive, meaning homeowners may have to choose between buying a freehold and extending their lease.

“If this were to happen, then if the lease were extended at a later date, it would still cost the same as if the leaseholder did not jointly own the freehold, except they would get some credit to reflect the fact that they were a part owner of the freehold,” Hill notes.

“In essence, they would be paying a proportion of the premium to themselves.”

Buying a property with a short lease

If you’re purchasing a property with a short lease, it is sensible to negotiate a discount on the asking price.

However, Hill notes this can be difficult as other buyers making offers on the property may not be aware of the issue despite there being a “material difference in value” between a house with a 99 year lease, and a 70 year lease.

“If you are serious about extending or negotiating, speak to a surveyor and get an estimate of what the premium is likely to be. The report will cost a few hundred pounds but without it you will not know what you are in for,” Hill states.

“Having negotiated on price, buyers of short leases should ask the seller to start the lease extension process by serving the required Notice on the freeholder. It can then be assigned to the buyer, enabling them to extend the lease right away, rather than having to wait two years.”

Buyers can only do this if the seller has owned the flat for at least two years. At this stage, buyers are also fairly committed to extending the lease, so must ensure they have the money to finish the process. If they were to back out, they would still incur legal costs to the landlord.

If the property is part of a house, or block of flats, a way of reducing costs could be to club together with other tenants to buy the freehold.

“If there are just two of you, you both need to agree to buy in order to force the landlord to ‘enfranchise’. If there are more than two flat owners, then you need a majority to force the landlord to sell,” Hill notes.

“This is a very complex area – it is essential that legal advice is taken.”

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