Does a recent transaction involving a short lease call into question the typical advice given by the property professions?
Conveyancing solicitors and property lawyers specialising in leasehold would normally advise clients against buying any flat with a “short” lease – by which they usually mean one with fewer than seventy years to run. But they might be a bit shocked by recent news that a flat with only one year left on the lease has just changed hands for an eye-watering £550,000!
Does this mean property solicitors don’t know what they are talking about?
Well, in most cases their advice is perfectly justifiable, but there are always exceptions to every rule and this sale is definitely an exception.
The three-bed luxury flat is located in Knightsbridge, London – “just a stone’s throw from Harrods” – which has no doubt helped inflate the price. And there is no doubt the property market in such parts of London is a law to itself.
Even so, if the new owner wants to enjoy the property for longer than a year, he or she will have to negotiate a new lease with the freeholder. Experts estimate this could cost £2 million or perhaps more.
Why most buyers shouldn’t buy flats with short leases
Most buyers will have great difficulty in purchasing a flat with such a short lease – or indeed any flat where the lease has fewer than 70 years to run.
The reason for this is that many mortgage lenders will not lend on a property with a shorter lease. See the UK Finance Mortgage Lenders Handbook for details on individual kender policy.
So you either have to have the cash available or try and get a mortgage from a non-mainstream lender – which would cost more.
The value of flats with short leases falls rapidly once the term falls below 70 years. So it is extremely rare for owners of flats to allow their leases to run down to such a short period – and certainly not let it run down to one year.
Apply for a lease extension, even if your lease has more than 80 years left
Most owners will be able to apply for a statutory 90-year lease extension and will be advised to do so once the lease has fewer than 70 years left to run.
Seventy years or more may not seem a short term to most people, but the fact is that it is cheaper to get a lease extension while the term has still got a long period to run.
Many owners don’t bother to get a lease extension because they have no immediate plans to sell. But it is well worth considering at any time – it will increase the value of the property and make it easier to sell in the future. If you delay until you want to sell, it can take months to complete an extended lease.
In fact, it is usually best to apply before the term reaches the 80-year mark, as once it does so, the amount payable for a lease extension is increased by “marriage value” – a complicated technicality that only professional valuers really understand.
But leaving technicalities aside, the value of any leasehold property generally falls as the term of the lease runs down while the value of the freehold correspondingly increases. So, instructing a conveyancing solicitor to apply for a lease extension before the lease has reached the 80-year mark is going to cost a lot less than allowing the lease to run down to a very short period.
Talk to us
At Homeward Legal, our nationwide panel of property lawyers have been dealing with lease extensions for years, and the expert solicitors we work with will be able to inform you of the best way forward when buying leased property.
Give us a call on 0800 038 6699 or use our quick quote system to find out how much the conveyancing on your leasehold property would be.
The 2-year qualification period and how to get round it
Generally speaking, an owner will have to have owned a property for at least two years before being able to apply for lease extension under the statutory provisions. Of course, there is nothing to stop a buyer approaching the freeholder for an extension on an informal basis at any time, but the freeholder may refuse outright or may only be willing to grant an extension on disadvantageous terms.
It is therefore common for a buyer to get round this two-year period by asking the seller to serve the statutory notice (assuming the seller is entitled to do so.) The seller can then assign the benefit of the notice to the buyer enabling them to obtain a lease extension under the statutory provisions.
The buyer will have to pay the freeholder for the lease extension (as well as legal and surveyor fees) so buyers will need to have a good idea of the cost of the new lease before proceeding.
When the owner of a leasehold flat dies, their personal representative may exercise the right to serve a statutory notice for a lease extension for a period of up to two years following grant of probate or letters of administration.
If the executor or administrator wants to sell the flat, they can serve the notice and assign the benefit of it to a buyer, enabling the buyer to purchase a lease extension in the usual way.
There will be some buyers who are prepared to buy up flats with short leases, although probably not normally as short as one year. An investor might consider he can get a good return on such a property by letting it out, while a retired person might be able to pick up a nice flat at a bargain price on the basis the lease has still got long enough to last the remainder of their lifetime.
Anyone buying a flat should get expert advice from their conveyancing solicitor and, if appropriate, from a surveyor as to whether a lease extension should be considered and the likely costs involved.
Give us a ring on 0800 038 6699 and we’ll help you in any way we can, whether your lease has one or 100 years left on it.