Short Lease Sales – Cutting Through The Complications
To the person-in-the-street, the prospect of selling a property with a ‘short lease’ sounds daunting – and if it’s any consolation, it can be complicated for experts too!
But please don’t be deterred because tens of thousands of such properties sell each year. To make sure the transactions go as smoothly as possible, a mix of research and compromise will be needed. We’ll help you with these steps.
What is a short lease?
Most leasehold properties (the majority are flats, but some are houses) have a lease duration of 99 to 999 years when first sold.
This means that for the 99 to 999 years you own the four walls of the property you occupy and everything within it, but not the land it’s built on nor the whole building if your flat is part of a block. The duration of the lease obviously, runs down over time and a ‘short lease’ is considered one of 80 years or fewer.
The land, and sometimes the communal areas in a block, will be owned by a freeholder, this is the person or firm to which leaseholders pay annual ground rent.
You will probably know the length of your lease already, from documents and title deeds dating back to when you purchased it. If you’re unsure, you can check your property information on the government’s website.
What’s the problem with a short lease?
The main problem is with a potential buyer securing a mortgage: most High Street lenders dislike short leases. This is because, if they are not extended, the property will fall in value rapidly as the lease duration drops.
The fall is property-specific as every case is different but as a rule of thumb a home with, say, 70 years on the lease could be at least 20% below the value of one with a full 99-year or longer lease.
A few lenders offer mortgages on short-lease homes. These can be with a higher interest rate, or the repayment term will be shortened. So, I’m stating the obvious when I say a seller with a short lease faces a double whammy. A loss of value on the home, and considerable difficulty finding a buyer.
There are other problems too, at least some of which were intended to be addressed by the Leasehold and Freehold Reform Act 2024.
This was passed by Parliament just before the General Election. However, many of its provisions require additional legislation to become effective and the new government has not indicated a timescale to undertake this. It may take years rather than months.
So, you should seek specific advice on your circumstances from an estate agent. Many will have experience of short leases and may for example have handled the sale of other homes in your block. The likelihood is you will be faced with different options. Each a trade-off in terms of cost and speed of sale.
Extending your lease: what to consider
Firstly, you could extend the lease.
Under the 2024 legislation, a buyer can now extend a lease as soon as they move in. Previously, they had to wait two years. A seller can extend the lease before moving, but this will probably take some months so moving plans will be on ice until this is completed.
Seeking an extension will require negotiation with the freeholder. Conducted by yourself or, more likely, a legal expert acting for you. As I say, each case is unique but here you can find a guide to the cost of a lease extension.
Most such negotiations are conducted amicably. If the freeholder refuses or suggests a wildly unreasonable cost, you can appeal to a tribunal. Even the smoothest negotiations will take some time, and legal fees are on top.
The cost of a lease extension will be specific to each property. The elements that determine the cost generally are:
- The sale price of the property.
- The number of years left on the lease.
- The annual ground rent paid by the leaseholder to the freeholder.
- Any improvements (if any) made by the leaseholders to the property concerned.
- Other factors like potential investment returns such as the expected income if the leasehold property were rented out.
Discussions over lease extension often include mention of something called ‘marriage value’. This is the increase in value of a leasehold property as a result of extending the lease.
Currently – although this may change in future – where the lease still has over 80 years to run, no marriage value is payable if the lease is extended. But below 80 years, the marriage value must be split 50-50 between the freeholder and the leaseholder.
So, this means, the leaseholder pays 50% of the marriage value to the freeholder as part of the overall fee for extending the lease.
Selling a property with a short lease
Secondly, you could simply take a hit on the sale price.
If you are willing to sell on the open market with the short lease, knowing the property’s value has been diminished. Of course, that’s an option – albeit a risky one.
You can sell through an auction or more traditionally through an estate agent. You may be lucky and find a cash buyer willing to snap up this bargain and then go through a lease renegotiation themselves. But buyers requiring a mortgage are likely to be deterred by the interest rates they will be charged.
Should you buy the freehold or use a quick buyer?
Thirdly, you could try to buy the freehold of your property.
If you have a free-standing house the process could be straightforward, although again involving legal advice to negotiate and complete. If your flat is in a block, purchasing the freehold would require all other owners to agree to do the same. This could take years and may even be impossible if one owner declines.
Fourthly, you could use a specialist so-called ‘quick’ buyer to purchase the home.
These quick buyers are typically financial services firms with substantial funds, so they do not require mortgages. They also often have links with conveyancers and others associated with property sales, to make the transaction easier.
They must be members of either The Property Ombudsman or the Property Redress Scheme. But remember that they are buying organisations and not estate agents trying to get the highest price for you.
So, there’s a predictable ‘but’ here – of course, they will buy at a substantial discount. To take account of the risk associated with either extending the lease themselves or selling to cover their costs and make a profit.
The choice is yours
Selling a short-lease property is more complex than selling one with a longer lease or selling a freehold house. It involves trade-offs and understanding and probably the use of an estate agency or legal expertise.
But it is perfectly doable, so good luck!
Last Updated: October 30th, 2024
