Selling A Flat With A Short Lease
When considering whether or not to buy a flat, the lease length is a very critical factor to ponder. A lease agreement’s duration can greatly impact the property’s value as well as its marketability. So, how long should a lease be when buying a flat?
Short-lease properties for sale often face challenges in the real estate market. Mortgage lenders are typically very wary of financing flats with a short lease, thus making it somewhat difficult for buyers to secure financing. The length of the lease can significantly affect the value of the flat. As the lease gets shorter, the property’s value may decrease, and potential buyers may be deterred by the uncertainty and additional costs of lease extension.
Most mortgage lenders have specific criteria regarding the minimum lease length they will accept for financing a property. Generally, lenders prefer leases with at least 70 to 85 years remaining, and some may even require 90 years or more. So, if you are wondering, ‘Should I buy a flat with a 90-year lease? Or should I buy a flat with an 85-year lease?’ Ideally, you should buy a flat with a 90-year lease or longer.
If a flat lease falls below 80 years, the cost of extending the lease can significantly increase, which then impacts the property’s value negatively. As the lease gets shorter, the chances of finding an open-market buyer will decrease, and the property’s worth may decrease even further.
So, what should you do if you own a flat with a short lease and you want to sell? There are several factors to consider regarding how to sell a flat:
- Extend the Lease Before You Sell: Stalling the sale to extend the lease may be a very wise decision. Give yourself at least six months to extend the lease to at least 95 years. This can then broaden the pool of potential buyers and in turn will help you to achieve gaining the full market value, as a short lease mortgage is harder to obtain.
- Extend the Lease During the Sale: If you have already taken steps to extend the lease and a sale is in progress, you can assign the benefit of the lease extension notice to the buyer during the sale process. If you decide to extend the lease of your flat, there are legal processes and costs involved. In England and Wales, leaseholders have the statutory right to extend their lease by 90 years beyond the current term, and the ground rent will be reduced to zero during the extended period. However, leaseholders must have owned the property for at least two years before being eligible for the lease extension.
- Collective Lease Extensions: In some cases, leaseholders who reside within the same building can come together and extend their leases as a whole. This can be a more cost-effective option because it allows all leaseholders to share the costs of the lease extension process.
- Lease Extension Costs: The cost of extending the lease can vary depending on factors such as the remaining lease length, the property’s value, as well as the ground rent. Leaseholders can expect to pay the premium for the lease extension, as well as the landlord’s reasonable legal and valuation costs.
- Extend the Lease After the Sale: Sometimes it is possible to negotiate with the buyer to cover the lease extension costs after the sale, either by paying in instalments or accepting a slightly lower sales price.
- Leasehold Extensions and Cost Calculations: When you choose to extend the lease, the premium calculation can be a bit complex. It will take into account factors such as the value of the flat, how long is remaining on the lease term, and the ground rent. It will be important to seek advice from a qualified surveyor or professional valuer who will be able to help to make sure that there is a fair and accurate premium calculation.
- Sell with a Short Lease: Some sellers choose to sell the flat “as is” with the short lease, but be prepared for buyers to expect a discounted price to account for the lease extension costs and associated hassles.
- Section 42 Notice: When a leaseholder wishes to extend their lease, they must serve a formal notice to the freeholder under Section 42 of the Leasehold Reform, Housing and Urban Development Act 1993. The notice sets out the terms of the lease extension, and the freeholder has a specified number of days to respond with a counter-notice if they wish.
- Seek Legal Advice: Dealing with leasehold property matters can be complex, so it’s advisable to seek professional advice from a qualified property solicitor or conveyancer with experience in leasehold transactions. They can guide you through the process and ensure your rights are protected. If you encounter issues related to the lease’s length and you were not properly advised when buying the flat, consult your previous conveyancer to explore potential legal recourse.
- The Lease Agreement: The lease agreement is a contract (which is legally binding) that tells more about the terms under which the leaseholder can occupy the flat. It includes details about the lease length, ground rent, service charges, rights, and responsibilities of both the leaseholder and the freeholder. It is vital to thoroughly review and understand the lease agreement before selling or purchasing a flat.
- Explore Quick Sale Companies: Consider selling to a “we buy any house” company with experience in purchasing short-lease properties, though the offer price may be much lower than you want to accept.
- Use Auction Houses: Selling at auction might attract private buyers who are more comfortable with purchasing short-lease properties.
- Buy the Freehold: If you are not in a hurry to sell your flat, then purchasing the freehold with other leaseholders can enhance the flat’s salability and make it a share of freehold.
- Leasehold vs. Freehold: When buying a property, it is very important that you understand the difference between leasehold and freehold. Leasehold means you have the right to occupy the property for a fixed number of years, as specified in the written and legal lease agreement, but you do not own the land that it sits on. Freehold, on the other hand, gives you full ownership of the property as well as the land it stands on.
- Commonhold: A commonhold is an alternative form of property ownership that does not involve leases or freeholds. It allows individual owners to own their units outright and collectively own the common areas of the building or development. Commonhold offers a more straightforward and transparent ownership structure. This become a viable alternative to leasehold in the future.
- Leasehold Reform: The UK government has been taking steps to reform the leasehold system to provide better protection for leaseholders. This includes proposals to cap ground rents on new leasehold properties and to introduce a commonhold tenure as an alternative to leasehold.
- Common Leasehold Issues: Leaseholders may also face other challenges related to service charges, ground rent increases, and disputes with the freeholder. It is vital to understand your rights and responsibilities as a leaseholder so that you can avoid potential problems.
- Leasehold Ground Rent: Ground rent is a periodic payment made by the leaseholder to the freeholder as part of the lease agreement. In recent years, there have been concerns over escalating ground rents on new leasehold properties, which is why the government has worked on proposals to restrict ground rent charges.
- Leasehold Houses: In the past, many houses were sold as leasehold properties, especially in new build developments. This has led to controversies and concerns among leasehold house owners, especially when they are facing high-ground rent charges or having difficulty extending their leases. Legislation changes have been proposed to ban the sale of new leasehold houses in some specific instances.
- Leasehold Valuation Tribunals: In case of disputes over lease extensions or other lease-related matters, leaseholders can take their case to the Leasehold Valuation Tribunal (LVT) in England and the First-tier Tribunal (Property Chamber) in Wales. These tribunals have the authority to resolve disputes and determine fair lease extension premiums, among other issues that may arise.
- Right to Manage: Leaseholders have the right to take over the management of their building from the freeholder through the Right to Manage (RTM) process. This allows them to be in control of service charges and maintenance decisions.
- Leasehold Enfranchisement: Leasehold enfranchisement refers to the process of leaseholders collectively purchasing the freehold of their building. This can be done through a process known as collective enfranchisement. Owning a share of the freehold can provide leaseholders with more control over the management of the property and it can potentially increase its value.
- Leasehold Management Companies: Some leasehold properties are managed by leasehold management companies, responsible for maintaining the building and providing services to leaseholders. Leaseholders typically pay service charges to cover the costs of these services.
- Leasehold and Shared Ownership: Shared ownership properties, where buyers purchase part of a property and pay rent on the rest of it, can also be leasehold. Prospective buyers of shared ownership properties should carefully review the terms of the lease before committing to a purchase.
Selling a flat with a short lease may present challenges, but with the right approach, there are potential solutions to achieve a successful sale. Remember, each property and lease agreement is unique, so it’s essential to do your research and talk to a professional before you buy or sell a flat with a short lease. Both buyers and sellers of leasehold flats must be well-informed about lease-related matters. Legislation surrounding leasehold properties can change, so staying updated with current regulations is essential for all parties involved.