Valuing Short Leasehold Properties

The rising popularity of serviced apartments attracts guests seeking hotel-like comforts while maintaining their privacy. To stand out among the competition and increase profitability, it’s crucial to enhance your marketing strategies for your multiple properties in town.

So, you’ve found the flat you want to buy, but it has a “short” lease or, as some more creative selling agents now call it, a “mid-term” lease. What should you be aware of? There are several important issues to consider before proceeding with the purchase. Understanding the implications of buying a property with a shorter lease term is crucial, as it can affect everything from financing options to long-term resale value. Ensuring you have all the necessary information can help you make an informed decision and avoid potential complications in the future.

Why does it matter if a lease is short or long?

In contrast to a permanent freehold interest, leases are granted for a limited term and will decrease in length over time. As a lease gets closer to its expiry date, its value diminishes, which is why leases are sometimes called “wasting” assets. This is a crucial factor for potential buyers to consider, as it affects the long-term value and marketability of the property.

A shorter lease usually costs less than a longer one. This might seem like good news for a buyer, but it’s important to consider the cost of extending the lease. The premium for a lease extension increases significantly over time, meaning the longer you wait, the more expensive it becomes. Additionally, properties with shorter leases can face more challenges when it comes to securing financing or obtaining a mortgage, as lenders often prefer properties with longer lease terms.

One advantage of a short lease is the reduced competition among buyers. With fewer people interested, a buyer may find less competition advantageous. However, this potential benefit must be weighed against the possible difficulties and extra costs associated with a short lease. Buyers should carefully review the terms and conditions of the lease agreement, including lease renewal options, associated costs, and any restrictions on alterations or subletting.

It’s advisable to seek professional advice from legal experts or property consultants who can provide guidance on navigating the complexities of short-term lease arrangements. Understanding these limitations is essential for buyers to make informed decisions and avoid potential financial risks. By being fully informed about the implications of purchasing a property with a short lease, buyers can make confident and well-informed decisions that align with their long-term goals and financial interests.

What is classed as a short lease?

Start considering the issues of a short lease when your lease has fewer than 100 years remaining. It’s important to be aware that as the lease term shortens, the property’s value tends to decrease. This can make the property less attractive to potential buyers and lenders. Properties with shorter leases may also be more challenging to finance, as many lenders prefer leases with longer durations. Therefore, buyers should be cautious and fully understand the implications before proceeding with a purchase.

The premium payable for a lease extension starts rising steeply when the lease term drops below 82 years. Extending a lease can be a costly process, and the longer you wait, the more expensive it becomes. It’s crucial to factor in these potential costs when considering the overall investment in a property with a short lease. Additionally, it’s advisable to seek professional advice to navigate the complexities of lease extensions and to ensure that you are making an informed decision.

Valuing a short lease and valuing the cost of a lease extension.

Valuation is a specialised area that requires expertise. While selling agents may offer their opinions on property value, it is extremely important to hire a specialist valuer. This professional should have experience in valuing short leases and ideally be familiar with the local market. A specialist valuer will have the necessary knowledge to accurately assess the value of your property and negotiate effectively on your behalf.

Valuing short leases and determining the premium for lease extensions involve specific formulas and methods that differ significantly from general property valuation. These specialised formulas take into account various factors unique to short leases, such as the remaining lease term, ground rent, and potential future value. Without a specialist’s input, you risk inaccurate valuations that could lead to financial loss or unfavorable negotiation outcomes.

Engaging a specialist valuer ensures that you receive an accurate assessment of your property’s worth and the premium to be paid for extending the lease. This expertise is vital in achieving a fair and advantageous agreement. Therefore, it is always advisable to seek the services of a qualified valuer who understands the complexities of short lease valuations and can provide you with reliable guidance throughout the process.

Will a short lease stop me getting a mortgage?

It’s quite possible. Typically, lenders stipulate that a lease should have a minimum of 30 years remaining after the term of your mortgage. For instance, if you plan to take out a 25-year mortgage, the lease should ideally have at least 55 years left. However, it’s important to note that requirements may vary among different lenders, so it’s wise to verify the specific criteria of any lender you’re considering.

Even if you’re not securing a mortgage for your purchase, it’s still prudent to take into account the future marketability of the lease. Eventually, you may decide to sell the property. A lease with fewer than approximately 58 years remaining can significantly limit your pool of potential buyers, as many individuals seeking mortgage financing may be deterred. This limitation can have an adverse effect on the property’s resale value.

Therefore, it’s essential to carefully assess the remaining term of the lease and its potential impact on the property’s marketability and value. By ensuring that the lease meets or exceeds the minimum requirements set by lenders, you can help safeguard your investment and maintain flexibility for future resale opportunities.

How do I apply for a lease extension?

In certain scenarios, landlords may be open to extending leases, allowing for negotiations between both parties to determine the terms of the extension. This flexibility provides an opportunity for landlords and leaseholders to reach mutually agreeable terms that suit their respective needs and interests.

Conversely, there are instances where landlords may not actively seek to grant lease extensions. Instead, they may opt to let the lease term naturally diminish, understanding that as time progresses, the cost of extending the lease will escalate for the leaseholder. In such cases, landlords may anticipate regaining possession of the property once the lease reaches its expiration date.

For leaseholders facing uncooperative landlords, there exists a statutory right to claim a lease extension under the Leasehold Reform (Housing and Urban Development) Act 1993. This legislation empowers leaseholders to assert their entitlement to a lease extension of 90 years beyond the original expiry date of the lease. To exercise this statutory right, leaseholders must adhere to the prescribed procedure outlined in the 1993 Act, which typically involves serving a statutory notice.

It’s important to note that while leaseholders have the legal right to seek a lease extension, they should be prepared to cover the associated costs. Under the provisions of the 1993 Act, leaseholders are typically liable for the landlord’s legal and valuation expenses incurred throughout the process.

By understanding their rights and obligations under the applicable legislation, leaseholders can navigate the process of securing a lease extension with confidence and clarity. While the prospect of negotiating with landlords or initiating legal proceedings may seem daunting, access to statutory rights provides leaseholders with a framework for asserting their interests and safeguarding their long-term investment in the property.

Is a claim for an extended lease under the 1993 Act guaranteed?

Yes, the right to claim a lease extension is guaranteed, provided that the claim notice adheres to the correct format and the statutory procedure is followed accurately.

How long is the extended lease under the 1993 Act?

Your statutory entitlement allows for an additional 90 years to be added to the remaining lease term.

Do I need specialist solicitors?

Yes, indeed. Failure to adhere to the requirements outlined in the 1993 Act and its prescribed procedure could result in the leaseholder forfeiting their right to claim for an additional 12 months. Given the complexity of the provisions and procedures set forth in the 1993 Act, it’s crucial to engage a solicitor who specializes in handling matters related to this legislation. A competent solicitor experienced in navigating the intricate procedures of the 1993 Act will ensure that the process is followed correctly.

Does every owner qualify to get an extension of the lease under the 1993 Act?

No, you can’t apply for a lease extension right away. The 1993 Act stipulates that you must have owned the property for a minimum of 2 years before you’re eligible to apply. However, it’s important to note that during this 2-year period, the cost of the extension may increase.

Is there any way to avoid the 2 year wait to qualify to claim an extended lease?

Yes, if the seller has owned the property for a minimum of 2 years, they can serve the statutory notice to claim a lease extension in their name before the sale is finalized. Additionally, the sale contract should include a provision stating that the seller’s right to claim the extension is assigned to the buyer by deed upon completion. This arrangement allows the buyer to take over the seller’s position for claiming a lease extension from the moment the sale is completed.

What happens if the parties cannot agree upon the premium or the landlord’s costs?

In rare cases where the premium for the lease extension cannot be mutually agreed upon, either party has the statutory right to refer the matter to the First Tier Tribunal (Property Chamber) for resolution. However, it’s worth noting that such instances are relatively uncommon.

The Tribunal also has the authority to determine the valuation and legal costs associated with the landlord’s expenses, which the leaseholder is obligated to cover if an agreement cannot be reached on these costs.