Are you searching for a flat to buy, perhaps in London or another urban area? If so, you’ll likely find that most flats are sold on a leasehold basis. You might also come across properties listed for sale at a price that seems surprisingly low compared to similar flats nearby. While it might seem like a bargain, there’s usually a reason behind the low price tag – and more often than not, it’s because the property has a short lease.
While the lower initial cost can be tempting, buying a flat with a short lease requires careful consideration and understanding. Before making any commitments, it’s vital to understand what a short lease is, how lease extensions work, and what you might be taking on by buying a flat with a short lease. Let’s take a look at some things to consider before buying a flat with a short lease…
What is a Leasehold Property?
Most houses in the UK are sold freehold, meaning you own the building and the land it stands on outright. Flats, however, are typically sold as leasehold. This means you own the right to occupy the property for a fixed number of years, as set out in the lease agreement. The actual ownership of the building and the land it sits on remains with the freeholder (sometimes called the landlord).
The lease agreement outlines the responsibilities of both the leaseholder (you) and the freeholder, including details on ground rent, service charges (for maintenance of communal areas, building insurance, etc.), and the length of the lease term. Original lease lengths are often long, perhaps 99, 125, or even 999 years. However, as time passes, the remaining term decreases.
What is Considered a Short Lease?
While new leases typically start with long terms, usually 99 years or more, this remaining time decreases year by year. A lease generally starts to be considered ‘short’ when the remaining term drops to 80 years or less. This isn’t just an arbitrary number; it’s a critical threshold for several reasons:
- Mortgage Lenders: Most high-street mortgage lenders become wary of lending on properties with leases below 80 years. Many have stricter requirements, often demanding at least 70 or even 85 years remaining at the end of the mortgage term, making it very difficult to secure finance.
- Marriage Value: Once a lease drops below 80 years, the cost of extending it increases significantly due to something called ‘marriage value’. This represents the increase in the property’s value resulting from the lease extension, and the freeholder is legally entitled to 50% of this increase. Extending before the lease hits the 80-year mark avoids this extra cost.
- Property Value: The shorter the lease, the less the property is worth. The value decreases more rapidly as the term shortens, particularly below 60 years.
While a property with, say, 75 years left might still be mortgageable for some buyers, anything below 70 years is widely regarded as a short lease property, significantly limiting its appeal and finance options, often restricting the market to cash buyers.
Some flats are even sold with just a few years remaining on the lease. While rare, it’s not unheard of, especially in busy urban areas where leasehold flats are far more common than freehold houses.
It’s important to remember: as the lease shortens, the property becomes less desirable to lenders and future buyers, and more expensive to put right.
Can a Property Lease Be Extended?
Yes. The good news is that leasehold property leases can be extended, but the process isn’t always simple or cheap. While you don’t have to extend the lease, failing to do so means the property’s value will continue to decline, it will become increasingly difficult to sell or remortgage, and eventually, it will revert to the freeholder.
In almost all circumstances, extending a short leasehold is beneficial. It protects your investment, makes it easier to sell in the future, and satisfies mortgage lender requirements. Generally, it’s better to address a short lease sooner rather than later, ideally before it drops below the crucial 80-year mark, to avoid paying marriage value and further depreciation. The shorter the remaining term, the more expensive the extension process becomes.
Extending a Short-Term Lease
Fortunately, leaseholders in England and Wales generally have a statutory right to extend their lease. The Leasehold Reform, Housing and Urban Development Act 1993 gives qualifying leaseholders the right to add 90 years to the existing remaining term. However, there’s a key condition: you must own the property for two years before you can legally require the freeholder to extend the lease through the formal Section 42 notice process.
Waiting two years after buying a flat with an already short lease is often far from ideal, as the property value may decrease further, and the cost of the extension will likely rise.
If you’re considering buying a flat with a short lease, you have a few potential avenues regarding the extension:
- Ask the seller to extend the lease before you buy: This is often the easiest and quickest option. You make your purchase offer conditional on the seller completing the lease extension before the sale goes through. This means you buy the property with a long lease already in place. However, the seller may not agree, or it could delay the transaction significantly.
- Ask the seller to start the process and transfer it to you: If the seller has owned the property for over two years, they qualify to start the formal statutory extension process. They can serve the Section 42 notice on the freeholder, and then, upon completion of the sale, assign the ‘benefit’ of that notice to you. This means you can take over the extension process immediately after buying, without the two-year wait. This is a common and practical solution but requires careful legal coordination.
- Buy the flat now and extend the lease later: You could buy the property knowing you’ll need to wait two years to formally extend the lease (unless you can reach an informal agreement with the freeholder sooner, though this offers less legal protection and the terms might be less favourable). While possible, this isn’t ideal and could cost significantly more down the line, as the extension cost will likely increase, and you might struggle to remortgage or sell during those two years.
The important thing is to weigh your options and understand that extending a short lease is possible, but it requires planning, negotiation and, in all cases, legal advice.
Negotiating a lease extension, whether formally or informally, involves valuation calculations, legal notices, and potential disputes, so professional advice from a solicitor and surveyor specialising in lease extensions is essential.
What Happens if a Leasehold Runs Out?
If a lease term expires completely and isn’t extended, ownership of the property legally reverts to the freeholder. This means the leaseholder no longer has the right to occupy the property. However, in practice, it’s rare for leases on residential properties to run down to zero without action being taken. Most leaseholders will extend well before expiry. If it did expire, the former leaseholder might potentially have some limited rights to remain under assured tenancy rules, but they would effectively become a tenant paying market rent, having lost their valuable asset. Extending the lease is the standard way to prevent this.
The Pros and Cons of Buying a Short Lease Property
Buying a flat with a short lease can be a smart move in some scenarios, but it’s not without its risks. Below are some key benefits and potential pitfalls to consider…
The Benefits of Buying a Flat with a Short Lease
- Lower Purchase Price: The most obvious advantage is the significantly reduced asking price compared to equivalent properties with long leases. A flat with a short lease is usually sold well below market value, which can be appealing and make ownership seem more accessible, particularly for cash buyers.
- Potential for Profit: If you can successfully negotiate a lease extension at a reasonable cost, the property’s value could increase substantially, offering a potential return on investment.
- Investment Strategy: Some investors can earn a return through rental income over the remaining lease term, then allow the lease to expire without needing to resell. This is a niche strategy requiring careful calculation.
- Specific Circumstances: For some buyers, like older individuals or those without dependents to inherit the property, the limited lifespan of the asset might be less of a concern if the price is right for their needs during their lifetime.
The Risks Associated with a Short-Term Lease
- Lease Extension Costs: Extending a lease can be expensive. You’ll have to pay the freeholder a ‘premium’ for the extension, plus your own legal and valuation fees, and the freeholder’s reasonable legal and valuation fees. Costs escalate rapidly as the lease shortens, especially below 80 years.
- Limited Mortgage Options: As mentioned, securing a mortgage is tough, as many lenders refuse to provide mortgages for flats with a short lease, especially under 70 years. This limits your options as a buyer and drastically shrinks the pool of potential buyers when you eventually want to sell.
- Difficulty Selling: A short lease property is inherently harder to sell. Even if you are a cash buyer, your future buyer might need a mortgage, making the property unattractive unless the lease is extended.
- Uncertainty and Hassle: The lease extension process can be complex, lengthy, and potentially contentious if disagreements arise with the freeholder over the premium.
- Associated Costs: Don’t forget ongoing ground rent (which may be high on older leases) and service charges, which still apply regardless of the lease length.
- Property Condition: Sometimes (though not always), properties with very short leases may have suffered from neglect if the owner couldn’t afford the upkeep or the extension, potentially requiring refurbishment.
Getting a Mortgage on a Flat with a Short Lease
It is extremely difficult to secure a mortgage when buying a flat with a short lease. Most mainstream lenders will set a minimum lease requirement, often 70–80 years. Below that, you’re likely looking at specialist lenders who charge higher interest rates and demand larger deposits, making finance challenging to obtain.
If you plan to buy such a property, be prepared to pay in cash or explore lease extension options before applying for a mortgage.
Is it Worth Buying a Flat with a Short Lease?
Ultimately, there’s no simple ‘yes’ or ‘no’ answer. A short lease property can represent a bargain and an opportunity, but it comes with significant financial risks and potential hassle.
Short lease flats can offer excellent value for cash buyers and investors, and the legal framework does provide leaseholders with rights to extend. However, the process can be complicated, time-consuming, and expensive, especially if you’re not prepared.
The significantly lower purchase price is tempting, but this saving must be weighed against the substantial cost of the lease extension, legal fees, and valuation fees. It’s crucial to get an estimate for the lease extension cost before you commit to buying. A qualified surveyor specialising in leasehold valuation can provide this.
Ideally, try to negotiate for the seller to initiate or complete the extension process before you buy. If that’s not possible, ensure you understand the costs and timeline involved if you have to do it yourself after purchase, including the two-year waiting period if applicable.
Buying a flat with a short lease requires thorough due diligence. Always seek independent legal advice from a solicitor experienced in leasehold matters and get a professional valuation for the lease extension. Be realistic about the total costs involved (purchase price + extension + fees) and compare this to the value of similar properties with long leases.
For the right buyer – typically a cash purchaser with patience, a good understanding of the process, and a contingency fund – a short lease flat can work. However, for many, the complexities, costs, and difficulties in obtaining finance mean it’s often wiser to seek properties with longer lease lengths from the outset.
Want to learn more about flat leasing or any other aspect of residential property management in London? If so, then contact the Red Brick Management team today.
