Is a short lease property worth buying?

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With ongoing leasehold reform and rising awareness of lease issues, buyers are increasingly cautious about short leases (i.e. where there are fewer than 80 years remaining of the lease term). While it is important to do your homework and go into a short lease purchase with your eyes open, they can still be a good investment if you can secure the right terms.

In this article, we explain the risks and costs of extending a lease, and when a short lease property can still be a good investment.

Need advice on buying leasehold property? Please contact Polja Atkins who will be happy to advise.

Key points to know about this issue

  • A short lease is one with fewer than 80 years remaining on the lease term
  • The value of leasehold properties drops sharply if they cross this 80-year threshold
  • Mortgager providers may refuse to lend on short lease properties
  • There is a strict legal process to extend a lease, with various costs and the potential for problems
  • Currently, you will need to pay a substantial sum towards the so called ‘marriage value’ when extending a short lease (i.e. the amount the property’s value would increase after the lease extension)
  • Marriage value is due to be abolished under the Leasehold and Freehold Reform Act 2024
  • However, no date has been set for when this provision of the Act will come into force
  • Other reforms to leasehold law are anticipated in the near future, creating an uncertain legal landscape
  • It may still be worth buying a short lease property if you can negotiate terms with the seller, such as for them to start the lease extension process or reduce the price to offset lease extension costs

Risks of buying a short lease

When looking at buying a property with a short lease, you should be aware that:

  • The property’s value will fall steeply as the remaining time on the lease continues to decline
  • You may struggle to secure a mortgage as lenders typically consider these properties to be high risk and may require a minimum number of years remaining on the lease after the end of the mortgage term
  • You must follow a strict legal process to extend your lease, including giving notice to the freeholder – if they cannot be contacted, this can delay things and increase costs as you will need to then use a different process
  • You will need to pay the additional ‘marriage value’ of the property to the freeholder, which is the amount its value will increase once the extension has taken place
  • You will also need to pay your own legal and valuations fees as well as the freeholder’s legal and valuation fees which must be reasonable
  • There may be other onerous terms, such as high ground rent, that could impact your purchase and ongoing costs

Costs for extending a short lease

When extending a short lease, key costs include:

  • Marriage value: This will depend on how long is left on the lease – the shorter the remaining term, the more the property’s value will increase after the extension, so the higher the marriage value.
  • Legal fees: You will need to pay for any legal support you require to extend your lease. I don’t know if this is correct
  • Valuation fees: As part of the lease extension process, you will need to have the property valued to determine the premium payable by a specialist RICS registered valuer
  • Freeholder’s costs: You will also need to pay the Freeholder’s legal and valuation costs.

Key changes to leasehold law to consider

The Leasehold and Freehold Reform Act 2024 is a gamechanger for leasehold property, but not all of its provisions have yet come into force.

One change that is already in place is that leaseholders now have the right to extend their lease from the first day of ownership. Previously, they had to wait 2 years before they could exercise this right.

Other key changes not yet in force include:

  • Abolishing marriage value
  • Setting a standard lease extension term of 990 years
  • Capping ground rents at a nominal, ‘peppercorn’ rate when an extension is carried out

There is also a proposed Commonhold and Leasehold Reform Bill making its way through Parliament, which contains provisions such as capping existing ground rents, banning new leasehold flats and encouraging the conversion of leaseholds to commonholds.

Tips for buying a property with a short lease

If you wish to buy a property with a short lease, you could:

  • Agree with the seller that they will start the lease extension process and cover the associated costs
  • Negotiate a reduction in price to account for leasehold extension costs
  • Potentially get a mortgage with a shorter repayment term to give your lender enough of a buffer before the lease term ends
  • Secure alternative finance, such as a bridging loan, to make the purchase, then convert to a mortgage after extending your lease (although this type of financing can be very expensive)

It is a good idea to have a lease extension valuation before making an offer, so that you can use this as the basis for negotiation if required. We also recommend using a solicitor with specific experience in short leases to help ensure the process goes smoothly and give yourself the best protection possible.

How Longmores can help with leasehold property

At Longmores, we can assist with every stage of dealing with leasehold property, including making a purchase, extending your lease and understanding your rights as a leaseholder. We have strong specialist expertise in even the most complex leasehold issues, so can provide tailored support for your exact circumstances.

For expert advice on leasehold matters, please contact Polja Atkins who will be happy to advise.

Please note, the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.