Unlike freehold properties, in a leasehold, you have the right to live in the property for just a specified number of years. The buying and selling process becomes more complex once the lease term drops below a certain threshold (typically 80 years). In this guide, we'll cover the step-by-step process of buying a leasehold with a short lease, how you might be able to extend it, and more. You'll learn:
What constitutes a short lease and its impact on property value
The step-by-step process of buying a short lease property
Key legal considerations
Risks and challenges of a short lease
What is a Short Lease?
A short lease is always regarded as any lease with 80 years remaining or less. When the lease term drops below 80 years, it becomes increasingly expensive to extend due to the introduction of “Marriage value.” This refers to the increase in the property’s value once the lease is extended, and it must be shared with the freeholder, making the process more costly.
As the lease term shortens, the property's market value decreases, making it more challenging to secure a mortgage. There is always a strict requirement by the mortgage lenders for leasehold properties. Some lenders may demand higher deposits or offer less favourable terms, while others may refuse to provide loans on properties with very short leases.
How to Buy a Leasehold Property with a Short Lease
Buying a property with a short lease is naturally slightly more complicated. Here's a quick run-through:
1. Obtain a Mortgage (If Applicable)
Obtaining a mortgage for a leasehold property with a short lease can prove to be challenging. Typically, the mortgage provider will require that the lease have a certain number of years remaining after the mortgage term concludes, often at least 40-50 years. This means that if you’re looking at a property with a particular short lease, it will be difficult to secure a mortgage unless there are plans to extend the lease soon after purchasing.
Before proceeding with an offer, you should check with potential lenders regarding their specific requirements. Some lenders might outright reject mortgage applications for properties with leases under 70-75 years. In contrast, others may agree to lend, provided certain conditions are met.
2. Negotiate the Price
This is a crucial step in the purchasing process. As the lease shortens, the property’s value diminishes, which should be reflected in the asking price. There are a couple of options for the buyer regarding price negotiation. One of them is to ask the seller to reduce the price to account for the cost of extending the lease after the purchase. This is especially important if the buyer will bear the responsibility of extending the lease.
Buyers can also request that the seller extend the lease before finalising the sale. In this case, the price may remain higher, but the buyer benefits from a longer lease and avoids the immediate costs and complexities of a lease extension.
3. Request a Lease Extension
If the seller has owned the property for over two years, they can serve a section 42 notice to begin the extension process, which can be taken over by the buyer. Alternatively, the seller can extend the lease as part of the sale. Buyers should consider the costs and terms of the extension and seek legal advice to ensure a smooth process.
4. Complete the Conveyancing Process
Completing the conveyancing process for a short-lease property is more complex than for a long-lease or freehold. The buyer’s solicitor must thoroughly review the lease term, service charges, ground rent, and any other issues regarding the lease extension. This careful examination ensures the buyer is fully aware of all financial and legal obligations before finalising the purchase.
Risks and Challenges of Buying a Property with a Short Lease
As you can imagine, there are certain risks and challenges that come with a property with a short lease:
Mortgage Issues: Securing a mortgage on a property with a short lease can be difficult. Many lenders require a minimum number of years to remain on the lease beyond the mortgage term, often at least 40 years. Buyers should check these requirements before committing, as a short lease could result in a less favourable mortgage term or limit financing options.
Potential Delays: In our experience, extending a lease can cause significant delays in the property transaction, especially if the freeholder is unresponsive or complications arise during negotiation. Buyers should anticipate potential hold-ups and plan accordingly, as this can affect the completion timeline.
Best Practices for Buyers
When buying a property, especially a leasehold, following best practices can help avoid costly mistakes.
Seek Professional Advice: Due to the complexity of purchasing a short-lease property, a buyer must consult with experienced surveyors and property solicitors. These professionals can guide the buyer through the lease extension process, ensure that all legal and financial risks are properly addressed, and negotiate with the freeholder.
Consider Long-Term Plans: Buyers should consider their long-term intentions for the property. Extending a short lease can be expensive, so it’s important to consider these costs when budgeting. A longer lease will increase the property’s value if you plan to sell, making it a worthwhile investment.
FAQs
How long does the lease extension process take?
The lease extension process can take several months, especially if it is part of the property purchase transaction.
Who should pay for the lease extension: the seller or the buyer?
The negotiation process determines who will pay for the lease extension. The seller may ask the buyer to reduce the asking price to reflect the cost of doing so or extend the lease.
Can I get a mortgage on a property with a short lease?
Yes, it can be challenging, as many lenders have strict criteria for properties with short leases.
How much does it cost to extend a lease?
The cost to extend a lease can vary depending on the length of the lease and the value of the property, but this often runs into thousands of pounds.
Conclusion
Purchasing a leasehold property with a short lease is a complex process that requires careful consideration and a thorough understanding of the legal and financial implications involved. The primary concerns include securing mortgage approval, negotiating the price to account for lease extension costs, and understanding the implications of marriage value once the lease term drops below 80 years.
By working with property law specialists, buyers can navigate the intricacies of leasehold property purchases, safeguard their investments, and avoid costly mistakes. At Lawhive, our property law experts offer tailored advice and personalised assistance to help buyers secure favourable outcomes and avoid potential pitfalls throughout the process and position for a successful outcome.
References:
Leasehold Reform Act from Gov.uk