When buying or selling leasehold property in the UK, the lease length is a crucial factor affecting its value. Short leases can significantly reduce a property’s market price and make it harder to sell or finance. In this guide, we explore how much a short lease can devalue a property and what options are available to leaseholders.
What is a ‘short lease’?
In the UK, a short lease generally refers to a leasehold property with fewer than 80 years remaining on the lease. This threshold is important because once a lease drops below 80 years, the cost of extending it increases substantially. This is because marriage value kicks in - a premium reflecting the increase in property value gained by the extension. Leases with less than 60 years remaining are considered very short and can be difficult to sell or mortgage.
Does a short lease really devalue a property?
Yes, a short lease can reduce the value of a property. As the lease term shortens, the future resale value decreases because potential buyers will need to extend the lease to maintain the property’s value. Additionally, lenders are often reluctant to offer mortgages on properties with short leases, limiting the pool of potential buyers.
How much does a short lease devalue a property?
The amount a short lease devalues a property depends on several factors. These include the remaining lease term, the property’s market value, and the cost of extending the lease. There’s nothing set in stone, and there are lots of other factors to consider, though some general estimates are:
A lease with 70 to 80 years remaining may reduce the property’s value by 10% to 20%.
A lease with 50 to 70 years remaining may lower the value by 20% to 30% or more.
A lease with less than 50 years remaining may decrease the value by more than 30%.
Why does a short lease devalue a property?
1. Higher cost of lease extension
The most significant reason a short lease reduces a property’s value is the increased cost of extending the lease.
💡Editor’s insight: “I’m often asked, what is marriage value? In the UK, once a lease falls below 80 years, the freeholder becomes entitled to claim a marriage value when calculating the premium for the lease extension. Marriage value basically represents the difference between the property’s market value before and after the lease extension, and it can be substantial.”
Example of marriage value:
If a property with a short lease is worth £200,000 and extending the lease adds £30,000 in value, half of this £30,000 (£15,000) will typically be paid to the freeholder as part of the premium.
2. Limited mortgage options
Lenders have minimum lease requirements, often between 70 and 80 years. Properties with shorter leases may not qualify for standard mortgage products. This can limit the pool of potential buyers. This means that the only buyers who can realistically purchase the property are cash buyers. Because of their bargaining power, cash buyers often negotiate heavily to reflect both the lease extension cost and the reduced competition.
3. Decreasing resale value
The resale value of a property continues to drop as the lease term shortens. As time passes, the cost of extending the lease increases, further reducing the attractiveness of the property.
4. Higher ground rent payments
Short leases often have escalating ground rent clauses, which can significantly increase annual costs. Excessive ground rent can not only strain finances but also make the property unmortgageable under new rules introduced in the Leasehold Reform Act 2022, which discourage unfair rent practices.
Can you extend a lease?
Yes, most leaseholders have a legal right to extend their lease under the Leasehold Reform, Housing and Urban Development Act 1993. The typical statutory extension adds 90 years to the remaining term and reduces ground rent to a nominal amount (typically £1, or nothing at all). For expert advice, it’s always best to get guidance from a lease extension lawyer.
Lease extension process explained
The lease extension process involves the following steps:
Check your eligibility: You must have owned the property for at least two years to qualify for a statutory lease extension.
Obtain a property valuation: A chartered surveyor can estimate the premium you’ll need to pay to the freeholder.
Serve a Section 42 notice: This formal notice informs the freeholder of your intention to extend the lease.
Negotiate terms: Both parties negotiate the premium and terms. If no agreement is reached, the case may go to a tribunal.
Complete the lease extension: Once terms are agreed, the new lease is executed, and you pay the premium and legal fees.
How much can lease extensions cost?
The cost of a lease extension depends on:
The property’s value
The remaining lease length
The ground rent and terms of the lease
Typical costs can range from a few thousand pounds for a lease of 70-80 years of its value, to tens of thousands for leases under 60 years. Professional fees for solicitors and surveyors also add to the total cost.
Is it worth buying a property with a short lease?
Buying a short-lease property can be a smart investment, but it depends on individual circumstances. Here are key points to consider when deciding if it’s worth it.
When it can make sense to buy a short lease property
Substantial discount on the purchase price: If the seller offers a significant reduction reflecting the cost of the lease extension, it could be a worthwhile investment. For example, if a property valued at £300,000 with a long lease available for £240,000 due to a short lease, you may gain equity by extending the lease.
Immediate plan to extend the lease: Buyers who qualify to extend the lease immediately or can negotiate for the seller to apply for an extension before completion can enhance the property’s value and future marketability.
Desirable location: Even a short-lease property in a prime area may retain value due to high demand. Extending the lease in these cases can be an investment that yields substantial returns.
Cash buyer advantage: If you are a cash buyer, short leases present opportunities for negotiation. Without mortgage restrictions, you can purchase the property at a discount and potentially increase its value by extending the lease.
FAQs
Is a short lease wasting an asset?
Leasehold is seen as a diminishing asset. As the lease length shortens, the value of the property declines. Without a lease extension, the property may eventually become unsellable.
How short is too short for a leasehold?
Many experts consider a lease below 60 years too short, as it severely limits mortgage options and requires a costly extension. A lease below 30 years is very difficult to sell.
Final thoughts
Short leases can significantly devalue a property, but with careful planning and professional advice, they may still present good investment opportunities. Understanding the costs and complexities involved is key to making an informed decision.
Looking for legal advice? Get in touch today for a free quote and to see how our expert property solicitors can help you.
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified professional.
