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May 16

What Is A ‘Short Lease’ Property And Should You Buy One?

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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.

When buying a flat or maisonette, whether for personal use or investment, it’s common to encounter leasehold properties. The remaining years on the lease significantly influence the property’s value. While a ‘short lease’ may seem financially appealing, it’s crucial to understand the implications before making a decision. This article examines the legal and financial ramifications of owning a flat with a short lease.

 

What Do We Mean By A ‘Short Lease’?

Residential leases for flats, maisonettes, and some houses are typically granted for an initial term of 99 years or more, with some extending up to an impressive 999 years. This long-term arrangement offers security and stability to both leaseholders and freeholders. However, as the lease term progresses, its remaining duration becomes a significant factor in property valuation and marketability. Once the lease term expires, ownership of the property reverts back to the freeholder, unless the leaseholder takes proactive steps to extend the lease. This process, known as lease extension, allows leaseholders to maintain ownership and control over their properties for an extended period, safeguarding their investment and securing their housing arrangements.

Properties with less than 80 years left on the lease are generally considered to have a ‘short’ lease. While this designation may raise concerns among potential buyers, it does not necessarily render the property unsellable or unattractive. In fact, short-lease properties are frequently bought and sold, particularly in areas with high demand and limited housing supply. In cities like London, where property prices are notoriously high, it’s not uncommon to encounter properties with leases of fewer than 5 years changing hands. Despite the apparent risk associated with short-lease properties, buyers are often willing to invest in them due to various factors such as location, potential for lease extension, and investment opportunities.

 

What is considered to be a ‘short’ lease?

In simple terms, a lease that dips below 80 years is classified as a short lease. Despite seeming lengthy, in leasehold terms, the 80-year mark serves as a crucial threshold, known as the ’80-year rule.’

Once a lease falls below 80 years, the expenses linked to extending it soar significantly. This increase is attributed to the introduction of marriage value, which refers to the value uplift generated by granting a new lease.

Can you extend the lease?

In most cases, extending the lease on a property is feasible, offering leaseholders options to secure their tenure. There are two primary methods for pursuing a lease extension:

 

  1. Statutory Lease Extension:

   Leasehold owners can exercise their statutory right to a lease extension under the Leasehold Reform, Housing and Urban Development Act 1993. This process involves serving a Section 42 Notice on the freeholder, outlining the proposed terms, including the desired extension length and ground rent adjustments. Eligibility criteria include a minimum ownership period of 2 years and an original lease term of at least 21 years.

   If purchasing a property with a short lease, while you may not meet the eligibility criteria, the seller might. In such cases, it’s possible to request a statutory lease extension as a condition of purchase, with the benefits transferred upon completion of the sale.

 

  1. Informal Lease Extension:

   Alternatively, leaseholders can pursue an informal lease extension by directly approaching the freeholder without adhering to statutory procedures. This method allows for flexible negotiations between parties, although it lacks the statutory protections provided under the 1993 Act. Without statutory safeguards, leaseholders may encounter challenges in negotiating favorable terms, potentially leading to less advantageous agreements.

   It’s worth noting that the landscape of residential leases is poised for significant changes, with the government proposing comprehensive leasehold reforms. These reforms aim to empower leaseholders by extending leases up to 999 years without ground rent obligations, signaling a potential shift towards greater leaseholder rights and protections.

 

Do I have to extend a short lease?

No, it’s not obligatory, but in most cases, extending a short lease proves advantageous.

Considerations for letting a lease expire may include:

– Landlords seeking to collect rental income without concerns about the lease reverting to the freeholder in the future.

– Individuals without heirs or retirees confident the lease will outlast them, avoiding unnecessary expenditures.

There’s no definitive right or wrong, but if you don’t fall into these categories, extending the lease sooner rather than later, or not at all, is likely the wiser choice.

 

What if you don’t extend the lease?

While extending the lease is often seen as the logical step to safeguard property value, there are scenarios where allowing the lease to expire might be preferable. For instance, older homeowners without heirs may not prioritize preserving property value as they have no estate to pass on.

Short-lease flats can also appeal to investors seeking high buy-to-let rental yields relative to the property’s purchase price. The potential for significant profit margins has historically enticed risk-tolerant investors to consider short-lease properties. Additionally, impending reforms to the leasehold system are expected to mitigate financial risks associated with such investments.

 

Is it possible to get the seller to extend the lease for me?

Yes, it’s feasible and frequently the optimal choice.

However, there’s a condition: the seller must have owned the property for at least two years to qualify for a statutory lease extension.

If they meet this requirement, they can serve the initial notice to the freeholder. You can then inherit the benefits of this notice, circumventing the two-year ownership prerequisite linked with statutory lease extensions.

 

Can you get a mortgage?

Purchasing a flat with a short lease can pose challenges when seeking a mortgage, particularly if the remaining lease term is less than approximately 80 years. Many mortgage lenders perceive the financial risks associated with such properties as significant, making it difficult to secure financing.

For those in need of financing, consulting an independent mortgage broker is advisable. They can explore various options, including shorter mortgage terms and specialist lenders. However, be prepared for higher interest rates, reflecting the lender’s heightened risk compared to traditional leasehold properties.

Short lease properties are often auctioned rather than being listed by estate agents due to their non-mortgageable status. Cash buyers looking for astute investments may find short lease properties appealing, despite the additional expenses and efforts required post-purchase to extend the lease term.

 

MORE Property blogs HERE: 

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Buy-to-let Home Insurance UK

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Is Buy-to-Let Still Profitable Today?

A Comprehensive Guide to Buy-to-Let Mortgages

First-Time Buyer’s Guide to Buy-to-Let Mortgages


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Can you extend the lease?, What Is A 'Short Lease' Property And Should You Buy One?, What is considered to be a ‘short’ lease?


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