Employment Solicitor Chris Dobbs outlines some key considerations for employers to try and limit the risk of hybrid working disputes and claims
Associate and Leasehold Specialist Anne Albritton looks at selling a flat with a short lease, discussing how short leases can affect the value of a property; and answers some of the questions that you may have.
What is a short lease?
Regardless of whether your flat is in a purpose-built block or a converted house it will more than likely be leasehold. This means that you have a right to occupy the flat for the term of the lease.
So if the lease term has 85 years left on it this is how long you can occupy the flat for and the flat can be bought and sold. The lease term, as the years go by, will shorten.
Does a short lease devalue a property?
As the lease gets shorter it reduces in value and becomes less attractive to mortgage lenders.
Different banks and building societies have different lending criteria regarding what lease term they consider acceptable.
How much does a short lease devalue a property by?
A flat with a short lease may lose 10-20% of its value however in order to ascertain how much a flat is devalued by specialist advice should be sought from a valuer who specialises in lease extensions.
The sale value of a leasehold property falls over time - once the remaining lease term drops below 80 years marriage value comes into consideration.
What is marriage value?
Marriage value is the increase in value of a property arising from the grant of a new lease and is included in the calculation of the premium, the freeholder is entitled to 50% of value which the extension adds to the property.
Can I sell my flat with a short lease?
Yes, you can to approach your landlord to see if they will negotiate an extension. If this is not successful you can start the process of obtaining a lease extension under the Leasehold Reform Housing and Urban Development Act 1993 (the Act).
Subject to owning the flat for two years, you can force the landlord to extend the lease for an extra ninety years on top of the unexpired term at a peppercorn (nil) rent.
How to sell a property with a short lease
If you do not have the money to extend your lease before you sell you can start the legal process for extending the lease and transfer it to your buyer.
All you need to do is trigger the first stages in the legal process for a lease extension between exchange and completion and the buyer can take over from completion.
The advantage of this is that the buyer will pay the premium for the lease extension but will not have to wait 2 years to qualify themselves under the Act. Your estate agent would be able to assist in negotiating the sale price to reflect the above.
Should I extend my lease before selling?
This depends on how soon you need to sell and how long you have left on the lease. As the years on a lease go down so does the value.
Generally speaking it is best to extend the lease before it reaches 80 years or below because of the reluctance of some lenders being prepared to lend on a flat with a short lease term.
How much does it cost to extend a short lease
The first step is to obtain specialist valuation advice. We can put you in contact with a suitably experienced specialist valuer. They will advise you of the likely premium to be payable for the lease extension. You can get in contact with one of our solicitors here.
Who pays for a lease extension, buyer or seller?
This depends upon who is paying the premium and costs for the lease extension. If the buyer is paying full market price then the seller should pay for the lease extension.
If the buyer is not paying the full market price because it has been discounted to take into account the cost of the lease extension then the buyer should pay for the lease extension.
When should I extend my lease?
It is generally a good idea to extend your lease sooner rather than later and certainly before the unexpired term falls below 80 years, if possible. This is because as the term of years left on the lease reduces, the value of your flat reduces, but the value of the landlord’s freehold interest increases. A lease extension can therefore enhance the value of your property and assist with its future saleability.
Mortgage lenders are becoming increasingly picky about the properties that they will lend on and short leasehold properties and ground rents are particular issues.
A number of lenders now refuse to lend on properties with less than 80 years un-expired or where ground rents are not at a reasonable level. Generally, the sooner you extend your lease the cheaper it will be as the premium payable for a lease extension increases as your lease gets shorter.
Increased ground rents
If your lease expressly includes a provision for your ground rent to increase then your landlord can do so. However, if your ground rent is fixed at a certain level, your landlord cannot increase your ground rent without your agreement.
How often does ground rent increase?
The timing of any increases in your ground rent will be expressly stated in your lease.
The Lease Extension Process
Extending the lease as a seller
The Leasehold Reform, Housing and Urban Development Act 1993 provides for most lessees who have owned their property for at least two years to extend their lease by an additional 90 years and to reduce their ground rent to a peppercorn (i.e.zero).
Other than these two amendments, the new lease will be on the same terms as the existing lease other than in some rare, specific circumstances. This is attractive to buyers and lenders due to the length of lease and the zero ground rent.
Where the property is being sold, the seller can begin this process (provided they have owned the property for two years) and the benefit of the claim can then be assigned to a buyer, even though the buyer has not owned the property for the required two years.
Executors are able to serve a notice in relation to a deceased owner’s property as long as they do so within two years of the date of the Grant of Probate and only if the deceased had owned the property for the required two years.
However, if the property is transferred into the names of the Executors at the Land Registry, they would have to wait for the usual two year ownership period.
Extending the lease as a buyer
A new buyer of a property can undertake an informal lease extension immediately after completion so that a sale is not delayed. However, the landlord can of course withdraw from the transaction and a buyer would not have the fall-back position of the statutory route as they will not have owned the flat for the requisite two years.
Alternatively, it may be more suitable for a buyer to require the lease extension to take place simultaneously with their purchase.
You can read the full article on buying a flat with a short lease here.
Leasehold specialist solicitors
Our specialist Leasehold Property Team is one of the largest in the region and are happy to discuss any queries that this article may have raised.
We offer all new clients a free initial chat with one of our bright, knowledgeable lawyers.