With property prices remaining high and the Bank of England raising interest rates four times between December 2021 and March 2022 to combat rising inflation, you may view a flat with a short lease as an attractive (and realistic) prospect. There are, however, both significant risks, and advantages, attached to buying a flat with a short lease, as you will see below.
Therefore, to ensure your best interests are protected, it is absolutely essential that you instruct solicitors who specialise in lease extensions (and very few do) to advise you before you commit to purchase the property.
Below are the answers to some of the most common questions associated with buying a flat with a short lease.
Got a short lease question? Call our specialist solicitors on FREEPHONE 0800 1404544 for FREE initial phone advice – with no strings attached.
What is a short lease?
When you buy a leasehold flat you are effectively purchasing a long term right to live in that flat. You do not own the building or the land that the building sits on.
The ideal situation when you buy a leasehold property is that the lease has over 80 years to run (preferably many more). A short lease is broadly one that has less than 70 years remaining.
But always watch out for a flat with a lease less than 80 years to run. That’s because the cost of extending your lease, goes up significantly the day your lease drops below 80 years (premium you will need to pay to the freeholder is increased by what is referred to as “marriage value”).
What are the risks associated with buying a flat with a short lease?
There are several risks associated with purchasing a short lease flat, including:
· Any leasehold property reshaped in value as a term get shorter – this is a particular problem with short leases
· Lenders are often reluctant to offer a mortgage on a property with a short lease due to the amount the value of a property depreciates. Although banks and building societies all have different lending criteria, generally getting a loan becomes increasingly difficult once the lease drops below 70 years. Much lower than that and you may find that you can only sell to cash buyers
Click here for roundup of how many of the leading lenders approach mortgage lending on short leasehold properties
· You may have a great deal of difficulty selling the property.
· The cost of renewing the lease could be considerable.
· You may need to wait two years before you can renew the lease (more on this below).
An experienced conveyancing solicitor will explain all the risks related to buying a flat with a short lease so you can make an informed decision. Depending on your circumstances, purchasing a flat with a short lease can sometimes be a bargain if it sells well below its market price and you have factored in the cost of renewing the lease in your purchase budget.
Are there any advantages in buying a flat with a short lease?
In short, yes.
As indicated above, buying a flat with a short lease comes with risks. But this puts off or disqualifies many buyers. And in particular, if you’re a cash buyer, you may find yourself in a very strong position to get a real bargain when buying a short lease flat – particular if the lease is so low that no one will lend on it.
In fact some canny buy to let investors use buying short lease properties as a strategy. And some of those are our clients.
But bear in mind, if you are looking to snap up a bargain short lease flat, you may have to wait. Too many estate agents don’t really understand lease extension and short leases – and as a result often give their clients an over positive idea of the value. But if you have cash and you are patient, you may find that yours is the only offer in town – and eventually the buyer may have no choice but to come down to your offered price.
How can I extend my lease?
The following criteria must be met before you can extend the lease on your flat:
· The lease must be a long lease i.e. one that was originally granted for 21 years or more (most flats are originally sold on a 99 or 125 year lease)
· You must have owned the property for two or more years (although there is no requirement for you ever to have lived in the property).
· Unless you have achieved 100% ownership the property must not be owned via a Shared Ownership Scheme.
If you are entitled to extend your lease then under the Leasehold Reform, Housing and Urban Development Act 1993, you have a statutory right to add 90 years onto your existing lease.
An informal lease extension is, as it implies, one without any formal process. There is no rigid timetable or formula to use. It’s simply a question of negotiating with your freeholder. The real risk however is that this this informal route gives you no protection. Your freeholder can simply withdraw or change the terms of any stage – and can set any price they like.
In contrast the formal or statutory route is based on a legal right. With a few very limited exceptions, your freeholder will not be able to refuse your application for a lease extension if you use this route – and provided your solicitor carries out all the necessary steps properly. This route gives you an automatic 90 years to add to your existing lease (i.e. if your lease runs currently for 60 years, the statutory route means you end up with 150 year term) and it also reduces the ground rent you will need to pay to what is known as “a peppercorn rent – which is effectively nil.
Click here to read more about the difference between private and statutory lease extensions
What is the statutory process of extending my lease?
The following is a brief guide to the process of formal lease extension.
• Step 1 – You must inform the freeholder that you plan to extend your lease and will be following the statutory process set out in the Leasehold Reform, Housing and Urban Development Act 1993.
• Step 2 – Instruct a Lease Extension Solicitor to advise and represent you.
• Step 3 – Instruct a specialist leasehold extension surveyor (again very few surveyors carry out this work), to assess the right level of premium (i.e. the price you pay to the freeholder) to extend your lease
• Step 4 – Your solicitor will draft a Section 42 Notice which sets out your offered premium. You will usually need to negotiate the premium your freeholder – that negotiation is often handled by your surveyor. If you and the freeholder cannot agree (this is rare) you can apply to the First-Tier Tribunal (Property Chamber) which will establish the premium to be paid. Fortunately it’s relatively unusual for lease extensions to need the involvement of the tribunal
Click here to read more about how the First-Tier Property Tribunal works
• Step 5 – If the freeholder has requested a deposit to be paid the money must be transferred before negotiations start. The deposit amount will be 10% of the lease cost stated in the notice or £250, whichever is greater. The amount will need to be paid within 14 days of serving the Section 42 Notice.
• Step 6 – The lease extension will be granted once the full amount of the premium is paid.
Do I have to wait two years before extending a short lease?
Technically yes, but you can get around this rule when buying a property by asking the seller, provided they have owned the property themselves for two or more years, to start the lease extension renewal process. There is no cost involved the vendor to do so – and the right to extend the lease immediately rather than wait 2 years, is assigned, or passed over to you on completion (i.e. assign the benefit of the notice).
The alternative, as mentioned above, is to approach the freeholder about extending the lease informally. With an informal lease extension, there is no two-year ownership required.
What are the risks of an informal lease extension?
Extending your lease informally (outside of the process provided for under the Leasehold Reform, Housing and Urban Development Act 1993) may be quicker and cheaper, however, it does come with risks.
The biggest chance you take when negotiating an informal lease is that you may pay a higher premium than you would if you had followed the formal process and issued a Section 42 Notice. That’s because with the statutory route, if you think the freeholder is asking price at 2 hi, you can refer the matter to the First-Tier Property Tribunal. That’s simply not available with an informal lease extension.
Furthermore, because the process is not dictated by the Leasehold Reform, Housing and Urban Development Act 1993 timelines, the freeholder can dawdle for months or even years, leaving you having to pay a higher premium. Worse still, negotiations could collapse, leaving you with no option but to apply under the formal route after completing the two years’ ownership requirement.
How much does a lease extension cost?
The costs associated with extending your lease are variable. You can take advantage of several online leasehold extension calculators to help you work out how much to budget. But never rely on these. They’re not available for very short leases, and only give you a very very rough idea. We always recommended a strong as possible terms that all of our lease extension clients get the premium accurately valued by specialist surveyor.
With a statutory lease extension you will also need to budget for the following additional costs such as:
· Solicitor’s fees (both yours and the freeholders).
· Valuation costs (both yours and the freeholders).
· Land Registry fees.
Our solicitors will provide you with a clear estimate of costs at the beginning of the lease extension process.
NB under the statutory route, if you don’t believe that the freeholder’s legal or valuation costs are reasonable, you can also refer that to the First-Tier Property Tribunal
What if I cannot locate the freeholder?
You can still apply under the Leasehold Reform, Housing and Urban Development Act 1993 to renew your lease if the freeholder cannot be located (also known as an absent landlord).
The Act requires you to make all reasonable attempts to locate the freeholder, for example by contacting the Land Registry or visiting the last known address of the freeholder. This is an even more specialist area than a more routine lease extension. Our team handle these regularly. So we can advise you on other steps to take to prove you have made every effort to find your absent landlord.
Once you have completed your reasonable attempts and if your freeholder is still missing, we can apply on your behalf to the County Court on your behalf for what is known as a “Vesting Order”. Before granting a Vesting Order the court will need to be satisfied that you taken every reasonable step to find the absent freeholder. That will often include requirement to place an advertisement stating you are looking for the freeholder of your property or, as directed by the Act, or take any further action “the court thinks proper for the purpose of tracing the person in question”.
If the Vesting Order is granted your case will be transferred to the First-Tier Tribunal (Property Chamber) which will set a price for the premium. You then pay that premium to the Court who hold that money on behalf of the freeholder, should they ever reappear.
Click here to find out more about missing freeholders and lease extensions
How to identify genuine lease extension specialists
That’s simple. Just ask any solicitor you’re thinking of appointing, how many lease extensions they have completed in, say, the last year.
We are sorry to say that the majority of solicitors handling lease extensions aren’t specialists and often really struggle to do a good job. That’s because they are often conveyancing specialists who handle lease extensions rare occasions as an add-on to conveyancing.
But don’t just take our word for it.
1. We are the only solicitors recommended by the HomeOwners Alliance (the U.K.’s leading organisation supporting nation’s 17 million homeowners) for lease extension advice.
2. We are Progressive Approved Solicitors – one of only three law firms nationwide recommended by Progressive Property, the country’s leading property investment education company.
We are also long-standing ALEP members – the Association of Leasehold Enfranchisement Practitioners) is the only specialist group for lease extension and enfranchisement surveyors and solicitors.
Click here to read some reviews of our lease extension solicitors from satisfied clients
Appointing a specialist surveyor
As previously mentioned, it’s really important that you get a surveyor who really understands lease extension valuation. Few do, they’re very technical.
But over the years we have built up an informal panel of surveyors throughout the country who specialise in this area. And we are happy to appoint 1 of them on your behalf to value the premium as part of our one-stop shop service.
Click here to find out more about the importance of appointing a specialist lease extension surveyor.
What happens if my lease term expires?
If you let your lease run out, your flat will revert to the ownership of the freeholder. At that stage you will no longer own anything.
However, you will not automatically need to leave your flat, because you have certain rights as a periodic tenant.