What Is A ‘Short Lease’ Property And Should You Buy One?
If you are considering the purchase of a flat or maisonette, either as a home for yourself or as a buy-to-let property investment, it will most likely be sold on a leasehold basis. This means that the number of years remaining on the Lease has a direct bearing on the value of the property. A ‘short lease’ property may therefore look like a financially tempting proposition – but is there a catch? In this article, let’s take a look at what it means to own a flat with a short lease including the legal and financial consequences of your purchase.
What Do We Mean By A 'Short Lease'?
Residential leases for flats, maisonettes and some houses are usually granted for an initial term of 99 years or more, and they can be as long as 999 years. Once the lease term has expired, the ownership of the property reverts back to the freeholder unless, that is, the leaseholder obtains a lease extension.
A property with less than 80 years left to run is regarded as having a ‘short’ lease. This is not a problem as such and certainly doesn’t stop these flats from being bought and sold. In London where property prices are high, it is by no means unusual to see properties with leases of less than 5 years changing hands.
Can you extend the lease?
Yes, in the vast majority of cases you can pay to extend the lease on the property. There are two different ways to go about this.
Statutory lease extension
Under the Leasehold Reform, Housing and Urban Development Act 1993, leasehold owners have a statutory right to a lease extension which they can initiate by serving a Section 42 Notice on the freeholder. “The Notice stipulates the amount you are offering to pay along with other details, such as the 90-year extension and the “Nil” ground rent to which you are entitled under the Act,” explains an industry expert. In order to be eligible for a lease extension, you must have owned the flat for a minimum of 2 years and the original lease must have been granted for at least 21 years.
If you are contemplating the purchase of a short lease property, you obviously won’t be meeting these criteria, but the seller might. If this is indeed the case, you can ask for a statutory lease extension to be initiated as a condition of purchase, with the benefit assigned to you on completion of the sale.
Informal lease extension
Of course, there is no reason why you have to follow the statutory process at all. There’s nothing to stop any leaseholder from approaching the freeholder with an informal request to extend the lease at any time and without any qualifying criteria. Both parties are free to negotiate as they please, with any agreement reached becoming fully legally binding once signed.
However, if you do enter into this type of informal arrangement, you won’t benefit from any statutory protection under the 1993 Act. You may also have less negotiating power with the freeholder who may decide to make a take-it-or-leave-it offer with terms that are favourable to them, but not so much to you.
Interestingly, the future of residential leases is set to change in the near future. The government is planning to introduce far-reaching leasehold reforms allowing leaseholders to extend their lease up to 999 years with no ground rent payable.
What if you don’t extend the lease?
While a lease extension seems the obvious solution to protect the value of the property, there may be situations when letting the lease run out may be the preferred course of action. Take the case of older homebuyers who may have no one to leave their estate to when they die, meaning they are not concerned about preserving the value of the property asset.
Short-lease flats can also be attractive to investors looking for high buy-to-let rental yields for the duration of the lease term that amount to a multiple of the flat’s purchase price. The lure of attractive profit margins has long encouraged risk-tolerant investors to take a chance on a short-lease property. And with an overhaul of the leasehold system on the horizon, the financial risks will come down substantially.
Can you get a mortgage?
If you are considering buying a short lease flat, you need to be aware that it can be very tricky to obtain a mortgage for a property that has less than about 80 years left to run. While lender criteria vary with regard to the minimum expired lease term, the majority of mortgage companies consider the financial risks of lending on short lease flats simply too great.
If you do require finance, speak to an independent mortgage broker who will investigate all possibilities including shorter mortgage terms and specialist lenders, but be ready to be hit with much higher mortgage interest rates to cover the lender’s additional risk compared to a regular leasehold property.
Short lease properties are often sold at auction rather than going through an estate agent, on account of their non-mortgageable status. If you are a cash buyer with an eye for a shrewd investment and don’t mind the added expense and effort needed post-purchase to restore the lease term, you may find that investing in short lease property is an excellent idea.
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