Buying a Property with a Short Lease: Yes or No?
Most homes in the UK are sold and owned on a freehold basis. This means that you own the property outright.
But, some properties are sold on a leasehold basis. If this is the case, you may have come across the term ‘short-term lease’. So, what exactly does this mean?
Here’s a look at what to expect when buying a property with a short lease. Is it a good idea, or should you avoid?
What is a leasehold property?
When buying a home, knowing the difference between freehold and leasehold is essential.
Leasehold properties are especially common in cities or those which reside within a larger building. This means that when purchasing the property, you’re buying ownership for a fixed period of time. The freeholder retains ownership of the land which the property is built upon.
So, when you buy a leasehold, you’re essentially on a long-term rental contract. This only applies to England and Wales, as Scotland does not have leasehold.
What does this mean for home buyers?
Normally this means that you’re able to purchase and occupy the property in a similar way to a freehold property – assuming there is a decent length of time left on the lease (they are usually issued for a period of 999 years).
You’ll need to pay the freeholder a ground rent, as well as a ‘service charge’ of sorts. These cover your proportion of the cost of maintaining and insuring the building.
If you’re getting a mortgage, your lender will probably only be happy to lend on something that has over 70 years remaining on the lease.
What is a short lease?
The lease is the period of time you’ll own the property for.
If you buy a property with a short lease, this simply means it has a shorter time remaining. During this period, the property can be bought and sold.
Buying a flat with a short lease
Leasehold flats the most common form of these type of properties. Many of these leases are for 99 years, for example.
Why buy a short lease property?
If you’re able to raise the money, buying a property on a short lease can be a cost effective way to get a foot on the property ladder. Having said this, most people are wary of getting involved.
Can you extend your lease?
There’s legislation in place that allows leaseholder to extend their lease after two years of ownership of a property. This means you can effectively pay for the property in two parts – one lump at the point of purchase and a further lump when you extend the lease.
Typically, a lease extension would result in your lease being topped up by 90 years. Though be sure to ask your solicitor to advise you about this as some large estates will only grant shorter extension periods. This may also cause issues getting a mortgage.
Applying for a lease extension
The outgoing seller could apply for the lease extension on your behalf (make sure that the cost of the new lease is included in the purchase price). Alternatively, you can wait and apply for an extension once you’ve lived in the property for 2 years. You need to investigate the cost of the lease extension and whether or not you’ll have the cash to pay for it.
If you have more than 80 years left on a lease, the cost of extension should just cover the administration for the legal work involved. As lease lengths get shorter, the cost of renewal rises to take into account the ‘marriage’ value that’s being added to the property with a longer lease.
Make sure you establish early on that the seller has the power to assign the lease to you. It’s also important to confirm that there’s more than 5 years remaining on the lease. This will avoid having to revert to the freeholder for their consent to extend the lease.
Leasehold Reform Housing and Urban Development Act 1993
The Leasehold Reform act allows those living in a leasehold property to force the freeholder to extend the lease. This must be done under attractive terms for the leaseholder.
Potential problems with leasehold properties
Bear in mind, however, some people have encountered problems with their short lease properties. Potential buyers should be aware of:
Spiralling ground rent charges
Ground rent charges have been the cause of controversy in recent years, leading to what’s now known as the leasehold scandal.
The leaseholder has no choice but to pay these increasing charges to the freeholder. They can double every 25, or even 10, years.
Unmortgageable properties
Trying to improve your chances of getting a mortgage? You might find it hard if buying a leasehold.
Some banks won’t lend to someone buying a property with a lease under 50 years. Sometimes, there can be difficulties getting a mortgage for a property with a 70-year lease also.
What’s more, those who own a leasehold property sometimes find it impossible to sell, due to others not being able to get a mortgage.
Is this an option worth considering?
Buying a property on a short lease can be a complex business and one that’s not for the faint-hearted.
For those who are considering this option, the right legal advice is essential. Therefore, always seek independent, expert guidance before making any commitment to buy.
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Last Updated: November 1st, 2024
