What Is A ‘Short Lease’ in London?

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When contemplating the acquisition of an apartment or maisonette, whether as a personal residence or an investment, it’s probable that it will be sold as a leasehold property. The remaining years on the Lease significantly impact the property’s value. Although a ‘short lease’ might seem financially attractive, are there potential drawbacks?

What Do We Mean By A ‘Short Lease’?

Leases for apartments, maisonettes, and select homes commonly last 99-999 years. After, ownership reverts to freeholder, unless a lease extension is sought. Properties with under 80 years left are considered ‘short’ leases. Despite this, they are still bought and sold, even in London’s high-priced market. Transactions with under 5-year leases are not uncommon.

Can you extend the lease?

Yes, in the overwhelming majority of instances, you have the option to make a payment to prolong the property’s lease. There exist two distinct methods to pursue this endeavor.

Statutory lease extension

According to the Leasehold Reform, Housing and Urban Development Act 1993, leasehold proprietors possess a legal entitlement to seek a lease extension. This process begins by serving a Section 42 Notice to the freeholder. This notice outlines the proposed payment, a 90-year extension, and the “Nil” ground rent as stipulated by the Act, as elucidated by an industry expert. To qualify for a lease extension, you must have owned the flat for a minimum of two years, and the original lease should have been granted for at least 21 years.

Should you be considering the acquisition of a property with a short lease, you may not meet these prerequisites, although the seller might. If that’s the case, you can stipulate a statutory lease extension as a purchase condition, with the benefit transferred to you upon the sale’s conclusion.

Informal lease extension

Certainly, you’re under no obligation to adhere to the formal statutory procedure. Leaseholders are free to approach the freeholder informally to request a lease extension at any point without any specific criteria. Both parties can engage in negotiations without constraints, and once an agreement is formalized, it becomes legally binding.

However, engaging in an informal arrangement means foregoing the statutory safeguards provided by the 1993 Act. Additionally, your bargaining position with the freeholder may be weaker, potentially resulting in a one-sided offer that favours them more than you.

Notably, significant changes are on the horizon for residential leases. The government plans comprehensive leasehold reforms that will enable leaseholders to extend their leases for up to 999 years without incurring ground rent charges.

What if you don’t extend the lease?

While extending the lease may appear as the logical approach to safeguard property value, circumstances could arise where allowing the lease to expire is a preferable strategy. Consider older homebuyers without heirs, untroubled by preserving asset value after passing away.

Investors seeking substantial buy-to-let yields often find short-lease flats appealing. The lease duration’s rental returns can significantly exceed the flat’s purchase cost, a prospect that entices venturesome investors. With upcoming leasehold reforms, financial risks will notably decrease.

Can I apply for mortgage?

When considering the purchase of a short lease flat, note that securing a mortgage for a property with less than roughly 80 years left can be challenging. Most mortgage lenders deem the financial risks associated with short lease flats to be significant, making it hard to obtain financing.

To secure finance, consult an independent mortgage broker who can explore options like shorter mortgage terms and specialised lenders. However, be prepared for higher interest rates due to increased lender risk compared to regular leasehold properties.

Short lease properties are often auctioned rather than listed by estate agents due to their non-mortgageable status. Cash buyers seeking strategic investments may find short lease properties attractive, despite the added expenses and efforts required post-purchase to extend the lease term.