We often get contacted by people having difficulty selling a property with a short lease. Selling a leasehold property is always more complicated than freehold, and things only get harder as the lease gets shorter. But what exactly is a leasehold property, why is it hard to sell with a short lease, and what does it cost to extend a lease on a property.
What is a lease?
In the UK, properties are sold as either freehold or leasehold. Buying a freehold property means you own both the building and the land it is on. Once you have paid your mortgage, you own the property and the land outright, forever. Buying a leasehold property means that someone else owns the land, and you only own the building for the duration of the lease. You own the right to live there, but you have pay rent to the freehold owner. At the end of the lease period, you own nothing and the property reverts to the freeholder’s ownership.
Most flats in the UK are leasehold due to the fact that many properties, stacked up, occupy the same piece of land. New leases can run from90 to 999 years when first purchased, however the clock starts ticking straightaway, reducing the length of lease that remains. There are estimated to be around four million leasehold properties in the UK, and around a million of these are thought to have a problematic short lease
Why is a short lease a problem?
In the past, many mortgage companies would offer loans on properties with lease of 25 years plus the mortgage term. This means that for a 25 year mortgage, you needed a minimum of 50 years lease remaining. However, since the financial crash, mortgage companies have tightened their lending criteria and many will not lend on properties with less than 70 or 80 years of lease remaining. Even if they do, the interest rates on these loans are significantly higher to compensate for the risks involved.
In addition to the mortgage issues, buyers are often reluctant to purchase a property with a shorter lease as they are essentially buying problems for themselves when they come to sell. To complicate matters further, once a lease drops below 80 years, it becomes much more expensive to renew.
If your property is un-mortgageable because of the short leave, and buyers are less interested in it because of lease restrictions, then market forces will naturally drive down the value of your property, if indeed you are able to sell at all.
Your right to extend the lease
The good news is that if you have owned the property for over two years, then you have the right, under the Leasehold Reform Housing and Urban Development Act 1993, to extend your lease. If you are buying a property with a short lease, this means that you will have to wait two years before you have the right to extend, although you may be able to extend sooner by mutual agreement with your landlord.
The bad news is that extending a lease on your property can be a very expensive business, involving valuation costs, legal fees and compensation for your landlord. It can also take many months of negotiations, and if agreement cannot be reached, you could end up waiting even longer for a tribunal to set the lease renewal price.
For example, in recent lease-extension case we dealt with it cost over £14,000 to extend the lease, including the fees and valuation costs that come along with it. If this isn't an option for you financially, you'll have to sell your property as-is.
How to extend your lease
There are two ways to extend your lease, either formally or informally. In either case, you should get expert legal advice before you start.
The formal route involves serving the freehold owner with a Section 42 notice, outlining your right to ask for an extension and stating your offer of compensation. They then have two months in which to respond.
If they reject your initial offer, then there is a further two-month period in which the two legal teams can negotiate before the matter is referred to the First Tier Tribunal who will set the compensation level for you.
The informal route is much the same except that you do not serve a Section 42 notice, you simply open negotiations with the freehold owner. (If they do not respond to this approach, then you can serve a Section 42 notice).
The cost of lease extensions
Lease renewal costs can run into tens of thousands of pounds, and you will need to pay this amount up front before you can put your home on the market. For example, for a £200,000 home with a 70 year lease, an extension could cost around £16,500, while a lease extension for the same home with just a 60 year lease could cost £26,500.
The shorter the lease, the more expensive it becomes to renew the lease on your home, as the freehold owner has more to lose. For example, if your home only has a 40 year lease remaining, then they stand to gain vacant possession of the property in 40 years. By extending this a further 90 years, they will not gain vacant possession for 130 years. And obviously if they get possession of the property, they can just sell it for its full value. Quite a windfall!)
What’s more, since new leases generally come with a peppercorn (or minimal) rent, any higher rent that they have been charging will be lost. In the above example, if your current ground rent is £100 per year, and reduces to peppercorn, then your landlord has lost £100 per year for 45 years.
A final factor in the equation is the increase in value of your home when a lease extension is granted. If the property has less than 80 years lease remaining, then the landlord is entitled to half of this increase in value, often referred to as the marriage fee or marriage value.
You can get an estimate of the cost of extending your lease by using the Government’s online calculator, but this will only be a ballpark figure.
You will also have to pay your own legal costs and valuation fees as well as the owner’s legal fees and other reasonable costs (although this does not extend to their fees if the case goes to tribunal). These can be well over £1,000.
Sell your home to a company
It can be very difficult to sell a short lease home on the open market, yet extending your lease can add months and significant costs to the already lengthy and expensive sales process.
But don’t despair, because there is an alternative. We can buy your short lease home for cash, with an offer in 24 hours and a smooth, simple sale to suit you. It's exceedingly easy:
- We're experienced so know how to deal with short lease situations (we actually buy any house - short lease and all)
- You can pass all the hassle of selling with a short lease on to us to deal with (remove the costs, delays etc)
- We have a pre-agreed buying facility in place so there's no waiting on mortgages etc
So, if you are stuck with an ever-decreasing lease that is making your home harder to sell with each passing year, and you just want the sale done, then talk to our friendly team today and see how easily you can sell your short lease home today. Click that link above to learn more, or hit one of those big blue "Get An Offer" buttons and enter your details to speak with our team. If you think this might be a good option to explore, we look forward to hearing you. (It's free and there's no obligation, so nothing to lose).