Are you searching for a flat to buy? If so, you may have come across some properties for sale for a fraction of the price you think they should be. This is likely down to the fact that the property has a short lease.
What is classed as a short lease property?
A short lease property is usually any lease with 70 years or fewer remaining. The shorter the lease on a property, the less it becomes worth. However, in some cases, properties with leases of five years or less remaining are still sold.
This is most often seen with apartments in urban areas due to the higher percentage of leasehold flats compared to houses.
If you are considering buying a flat with a short lease, it is vital to research both the laws surrounding purchasing properties with short leases and the property itself in order to make sure you understand what you are taking on.
Extending a short lease
Leaseholders have a statutory right to extend their lease by 90 years once they have lived in their property for two years. If you plan to purchase a property with a short lease, waiting two more years before you can apply to extend it is far from ideal.
If the previous owner has lived in the property for two years or more, you can request that they serve a statutory notice to extend the lease as a condition of purchase. This can then be assigned to you as soon as the sale is complete.
Benefits of buying a property with a short lease
Flats with short term leases can seem a very appealing prospect to retired people and those who have no dependents or relatives to leave an asset to after they pass away.
Properties with short leases are also attractive to buy-to-let investors who can make their investment back many times through renting the property for the remaining duration of the lease, then simply allowing the lease to revert back to the freeholder after a few decades.
Risks associated with a short-term lease
Short term leases generally occur when the owner cannot afford to extend their lease. As such, they are often found in less affluent areas. In addition, properties with short term leases are often in less than perfect condition and can require extensive, costly refurbishment before they are habitable.
You must also factor in the cost of any ground rent and maintenance fees within the terms of the lease, which may be considerable. Bear in mind that even if you do not intend to renew the lease on a flat and you are planning to simply allow it to run down, there are many other costs involved.
The main risk involved with a short lease, is that it is much harder to sell on. As the lease on a property becomes shorter, the more it’s value declines. A property that is quickly losing value is not appealing for prospective buyers or mortgage companies. As most banks and companies will not provide mortgages for properties with a lease of less than 70 years, the market is limited to cash-buyers.
What happens if a leasehold runs out?
If a leasehold expires, the property will revert to a freehold property and be under the ownership of the freeholder. This means that you no longer have tenancy and the freeholder is able to regain full use of the property. However, you do not need to leave the building, unless you or your landlord actually ends the agreement under the lease.
You do have the right to extend the lease further. However, it is important to be aware that it will become increasingly more expensive as the lease gets shorter.
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. The only loans available are likely to be through specialist lenders and they will charge a far higher rate of interest than average due to the high risk nature of a short lease property purchase.
If possible, you should, therefore, be prepared to pay cash for the flat in order to make the property a good investment.
Want to learn more about flat leasing or any other aspect of residential property management in London? If so, then contact the Redbrick team today.
