What is a leasehold?
Almost all apartments and flats in London are leasehold. If you purchase a leasehold, you will own the property but not the land it stands on. The owner of the land is known as the freeholder, and once your lease runs out, the entire property will revert to them. You will also have to pay rent to the freeholder, known as ‘ground rent.'
Can I extend my lease?
Under the Leasehold Reform, Housing and Urban Development Act 1993, most leaseholders are entitled to extend their lease by 90 years after they have been a registered owner of the property for two years.
How much will it cost me to extend my lease?
The cost of extending your lease depends on many variables, including how long your existing lease has remaining, annual ground rent, the value of improvements to the property paid by the leaseholder, and external factors such as expected rate of return on investment.
There are several online leasehold extension calculators available that can help you work out the cost of extending your lease.
Be careful to calculate the additional costs on top of extending the lease itself. These may include:
- Valuation costs (undertaken by a surveyor)
- Negotiation costs (typically undertaken by the surveyor)
- Land Registry fees
If you initiate the lease extension process, you will most likely have to pay the freeholder's legal and valuation costs as well as your own.
What is considered a short lease?
If you have been researching the London leasehold property market, you will probably have come across the figure of 80 years. 80 years is important in relation to leaseholds because purchasing a property with fewer years remaining on the lease can seriously affect its value and the amount you must pay to extend the lease.
Freeholders wait with bated breath for a lease on their property to drop below 80 years. This is because the tenant must pay the ‘marriage value’ of the property on top of the usual costs of extending a lease.
What is the ‘marriage value’?
Under the Leasehold Reform, Housing and Urban Development Act 1993, the landlord is entitled to half the marriage value of their property if a lease shorter than 80 years is renewed. The marriage value (or marriage fee as it is sometimes known) is the overall increase in the market value of the property gained through extending the lease.
Having to pay 50% of the marriage value can add up to thousands of pounds.
Will I get a mortgage if I purchase a property with a short lease?
Most lending institutions will not provide mortgages for properties with less than 70 years to run on their lease. Therefore, those that do take the risk of buying a flat with a short lease tend to be cash buyers.
If you are a buy-to-let investor who is also a cash buyer, you may consider that the amount of rent you receive for the remaining life of the lease on a desirable London property provides more than an adequate return on your investment.
Can I negotiate for the seller to extend the property’s short lease?
If you decide to go ahead and buy a property that has a short lease, it is sensible to try and negotiate down the asking price.
Once you have negotiated on price, you can ask the seller to begin the lease extension process by serving the required Notice on the freeholder. The Notice can then be assigned to you, enabling you to extend the lease right away, rather than having to wait two years to get the process underway.
The importance of seeking legal advice
If you are contemplating buying a flat with a short lease, it is crucial that you obtain advice from a solicitor experienced in dealing with leaseholds. Not only can they provide guidance through the purchasing process, but they can also negotiate with the seller on your behalf to get the best deal on the property.
As long as you acquire expert professional advice, the risks of buying a property with a short lease can be mitigated. Such a tactical buying move may mean you can move into a dream property with a prime postcode at a drastically reduced price.
Guillaumes LLP Solicitors is a full-service law firm based in Weybridge, Surrey. We have a highly experienced conveyancing team who can assist you with buying and selling residential property. To make an appointment, please call us on 01932 840 111.