Navigating the Maze of Short Lease Flat Purchases

Published: 19/09/2023

In the world of real estate, opportunities often come with various strings attached. One challenge prospective homeowners might encounter is buying a flat with a short lease. This unique property arrangement has considerations and implications that every buyer should know before taking the plunge into ownership. In this blog post, we'll walk you through the key factors to keep in mind when considering the purchase of a flat with a short lease.

Understanding Short-Term Leases
First things first, what exactly is a short-term lease? Properties can either be 
freehold or leasehold. With a freehold property, you have indefinitely complete ownership and control over it. However, in the case of a leasehold property, you only own the property for the duration of the lease. When the lease term expires, ownership reverts to the landlord or freeholder.

Typically, leasehold properties start with a lease term of 99 years or more, with some stretching to 125 years or an astounding 999 years in the case of new-build homes. So, when does a lease become "short"? A lease with 80 years or less remaining is generally considered a short lease.

The Impact on Property Value
One crucial consideration is how the remaining lease term affects the property's value. As the lease term shortens, the value of the property decreases. A flat with 99 or more years left on the lease will be valued close to that of its freehold counterpart. However, as the term dwindles, the property's relative value decreases accordingly. A flat with 70 or more years left might retain around 85% to 90% of its total value, while one with only 50 years remaining could dip closer to 70%. Ensuring that the property's value aligns with the lease's remaining term is vital.

The Right to Extend
To counteract the challenges posed by short leases, the  
Leasehold Reform Housing & Urban Development Act 1993 was enacted, giving leasehold property owners the legal right to request a lease extension. After residing in the property for at least two years, you can exercise your statutory right to extend the lease by 90 years. However, waiting two years to pass might not be ideal when dealing with a short lease. In such cases, some buyers may request the current owner to initiate the extension process if they've lived in the property for two or more years.

The Costs of Lease Extension
Yes, extending a lease does come at a cost, but the amount can vary widely. The Act outlines the calculation process for determining the premium, which is the cost of extending the lease. Negotiations will ultimately determine the final premium, but it considers factors like the freeholder's interest reduction, potential losses, and the "marriage value." The latter refers to the increase in property value resulting from the lease extension. Remember that if your lease has 80 years or less remaining, the freeholder is entitled to 50% of the value increase.

The Pros and Cons of Short-Lease Flats
Now that we've explored the intricacies of short-lease flats let's weigh the pros and cons:

Benefits:
  • It is attractive for retirees or those without dependents seeking affordable housing without worrying about long-term value.
  • A potential boon for buy-to-let investors who can generate significant returns by renting out the property before the lease expires.
Risks:
  • Short-lease properties can be harder to resell as the lease diminishes in value.
  • Short leases may be available due to the owner's inability to afford an extension or property repairs, often in less affluent areas.
  • Consider additional costs, such as maintenance and ground rent.

Understanding Ground Rent
Ground rent is an annual fee payable by the leaseholder to the landlord. It can range from a modest £10 to a more substantial £100-£200. Be sure to examine the ground rent terms in the lease agreement, as some may increase over time, regardless of inflation rates. Understanding these terms is vital to avoid unexpected financial burdens.

Demised Premises and Sinking Funds
In leasehold arrangements, your ownership typically extends from the flat's interior surfaces to the joists and ceilings. External and structural elements, as well as the roof, remain the freeholder's responsibility. This can limit your renovation options without the freeholder's permission. Additionally, be aware of sinking funds reserves set aside for major maintenance work. Check the lease agreement for details on your contribution.

Mortgages on Short-Lease Flats
Obtaining a mortgage for a short-lease property can be challenging. Most UK lenders consider leases with less than 75-85 years left as "short." However, this threshold varies among lenders, so exploring your options and potentially negotiating a lease extension with the current owner is crucial to facilitate the mortgage process.

In conclusion, buying a flat with a short lease requires careful consideration of the property's value, your rights to extend, associated costs, and potential risks. It can be an attractive option for specific individuals or investors but demands a thorough understanding of the lease's terms and implications. Whether you're a retiree or an investor eyeing potential returns, ensure you're well-informed before diving into short-lease flat purchases.

Circa London is a Sales & Lettings agent in central London.  If you are looking for a property to buy in London, our friendly and knowledgeable team will be delighted to assist you.  


*NB Disclaimer: The information provided in this blog is for general informational purposes only and should not be considered as financial or investment advice. Investing in real estate involves risks, and it is essential to conduct thorough research and seek professional guidance before making any investment decisions.
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