Buying a leasehold property with a short lease

How do you find out the length of your lease?

You can find out how long your lease has to run by reviewing the Land Registry lease document provided by the seller. It will always state the length of time left to run from the date of the lease so you'll need to work out how long there is left as of today's date (just like the above example).

Now although you may not think this is an issue because you plan to move out well before the 53-year period has ended, mortgage lenders on the other hand are unlikely to lend you money to buy the property if the lease has less than 80 years to run. You can extend the lease under statutory processes found in the Leasehold Reform Act 1993 as long as you are eligible (read this article about the Lease Extension Process), however the challenge here is the cost involved in extending the lease because it can run into the £10,000s, especially when the remaining lease term is less than 80 years.

As the buyer you cannot extend the lease - only the seller can.

This means that if you are going to extend the lease on the property you are buying, you are going to need to get the seller to do it. You'll need to agree the route to take and who is going to pay for it including the premium, solicitor fees, surveyors fees and freeholder fees. Read about the costs of extending your lease

What is a short lease?

If your remaining lease falls below 80 years, it is commonly known as a 'short lease'. Newer leasehold properties built from 2000 onward often come with a long lease, something in excess of 125 years. The longest lease you can get is 999 years. Flats that were built before 2000 often came with a 99 year lease, so look out for 1960s or 1970s leasehold flats as you are most likely going to need to extend their leases.

What's the problem with a short lease?

The greatest challenge when buying a leasehold with a short lease lies with getting mortgage lender to grant you a mortgage to buy the property. There are few mortgage lenders who will agree to loan you a mortgage if the remaining lease term is less than 80 years, and there are even fewer who'll lend if it is as low as 70 years.

Even if you can find a mortgage lender, you are merely putting off extending your lease: when you try and sell, the lease term will be even lower making your property even less attractive to prospective buyers.

The challenges of a short lease are simple, however you must first understand a few principles:

The lower the lease term the more costly it is to extend (read this article on lease extension valuations
You cannot extend your lease under the statutory process if you have a lease lower than 20 years (NB and you have to have owned your property 2 years before you can apply for a formal lease extension)
Property prices go down in value under 80 years

So if a mortgage lender agrees to lend to you on a 55 year lease with a 35 year mortgage, then when you come to sell, you might find it almost impossible because the lease you are selling wouldn't be able to be extended using the formal process making it too unattractive to the vast majority of buyers. This is why mortgage lenders won't lend you money when you have a short lease.

Another issue is that if a mortgage lender loaned you the mortgage with 70 years left to run on the lease and 10 years later you tried to remortgage and extend the lease, the cost of the lease extension would be in the £10,000s and would most certainly exclude you from a) being able to extend the lease under the statutory route due to the costs involved and b) sell the property to anyone else who buying with a mortgage because no mortgage lender will lend to them on such a short lease. This would mean you are stuck owning a lease that is going down in value with the cost to extend going up with every year that passes.

What should you do if you have a short lease?

You need to agree how best to move forward with extending your lease while the seller still owns the property, and is, in most cases, eligible to extend the lease with the freeholder under the statutory process.

"Never exchange contracts with a short lease until you have a plan on how you are going to extend the lease yourself"

These are the options you have available:

Extend the lease before you buy the property

This is the preferred option for you. It means that the seller passes title to you with a lease that has been extended.

Who should pay for the lease extension premium?

This depends. If the lease is short and you are paying under the market value of what the property would be worth with a long lease then you should pay the premium to extend the lease. If however, you are paying the current market price as if the property had a full lease then the seller should pay for the lease extension premium.

Pros

Your mortgage lender will agree to lend based on the extended lease term; they may not do this with the un-extended short lease.
You can agree with the seller that they cover the costs of the lease extension including the premium, solicitor's fees, surveyor fees and freeholder's fees (only normally achievable if your offer is for the current market value of the property with an extended lease, but not if the property is being sold as a short lease).
The longer lease is registered on completion meaning less overall work for solicitors to do.
You can use this as a bargaining tool to ensure everything gets completed at the same time which means that the seller is also going to push for the process to be as speedy as possible.
You also have the option to pay the seller for the lease extension if you are paying below market price for the property.

Cons

You are not in control of the process - only the seller can deal with the freeholder in extending the lease.
Although the final lease and terms are agreed by your solicitor, only the seller is able to chase the freeholder: you are left waiting for others to carry out the tasks needed to complete the process.
By completing the lease extension process on the day of completion you are going to extend the time it takes to complete the conveyancing from 2 to 6 months; sometimes even longer if the freeholder does not respond quickly.

Get the seller to serve the Section 42 notice before exchange and extend the lease after completion

If option 1 is going to take too long to complete then this is the next best option, although it comes with some dangers. By getting the seller to serve the Section 42 notice on the title ( read more about the Section 42 notice), this passes the statutory right to extend the lease to you after completion. You'll then need to agree the new lease term directly with the freeholder, although there is no guarantee the freeholder will agree to the notice and you may need to go as far as applying to the Leasehold Valuation Tribunal to rule on the value of the premium you'll have to pay to extend the lease (this is very costly and can take months to complete).

Who should pay for the lease extension premium?

This depends - and goes back to the scenario above. If the lease is short and you are paying under the market value of what the property would be worth with a long lease then you should pay the premium to extend the lease. If however, you are paying the current market price as if the property had a full lease then the seller should pay for the lease extension premium. In the latter example, the seller or buyer's solicitor would hold the lease extension premium amount as a retention until the freeholder agrees the final sum and then the retention is used to pay the lease extension premium. Be careful though to make sure the retention is large enough so as to cover the premium.

Beware informal lease extensions!

Informal lease extensions don't follow the statutory route. They can be agreed for any number of additional years and for any amount of premium, however they cannot be enforced by the buyer before or after completion. Unlike the Section 42 notice that transfers the right to extend to the buyer, informal proceedings can stop at any time leaving the buyer exposed to owning a short lease after completion. Informal lease extensions should only be agreed to by the buyer if the seller completes the lease extension on the day of completion.

Pros

You are in control of the final stage of the process of extending the lease.
You can agree that the seller covers the costs of serving the Section 42 notice (only normally achievable if your offer is for the current market value of the property with an extended lease, not with a short lease).
You can complete the purchase quicker.
You pay the cost of the lease extension premium based on the date of the serving of the Section 42 notice.
The lease extension premium is valued based on the property's value at the time of the seller serving the section 42 notice.

Cons

Your mortgage lender may not agree to lend you the mortgage money (you should check with them about this).
The longer lease isn't registered on completion and you will incur additional work with solicitors.
You run the risk of drawn out negotiations with the freeholder relating to the lease and costs to extend.
You pay all of the costs to extend the lease including solicitor fees and all the freeholder's fees.

Extend the lease after completion

This is only an option if your mortgage lender is happy to lend you the money based on the current lease term. The cost to extend will be more as you'll need to wait the statutory 2 years before you can start the formal lease extension process.

Who should pay for the lease extension premium?

Pros

You are in control of the final stage of extending the lease extension process.
You can negotiate with the seller that they cover the costs of the Section 42 notice (only normally achievable if your offer is for the current market value of the property with an extended lease, not with a short lease).
Your mortgage lender may not agree to lend you the mortgage money (check with your mortgage lender to find out if they will agree to this).

Cons

The longer lease isn't registered on completion and you will have to pay for your solicitor carrying out additional work.
You run the risk of drawn out negotiations with the freeholder with regards to the lease and costs to extend.
The cost used to calculate the lease extension premium could be more if the property price has increased.
You pay all of the costs to extend the lease including solicitor fees, surveyor fees and the freeholder's fees.

"The estate agent told me I had a 89 year lease, I now find out it is only 69 years - what do I do"

Finding out you have a shorter lease than what was sold to you can leave you feeling very upset - and you should be. By the time you find out the actual lease term of your property you most likely have already paid for your solicitor, mortgage valuation and property searches. If you paid for the full market value of this property on the basis it has a long lease, and now you find out you have a short lease, then you'll need to either:

Negotiate down the sale price; or

Agree the seller pays for the lease extension

Remember, if you are paying full market price for the property then you should have a long lease. As soon as you get a short lease then the property price goes down in value.

Here is an example email you can send to your estate agent if they have sold you a property that you find out has got a shorter lease than was advertised to you.

Hi AGENT NAME,

Re: PROPERTY ADDRESS

I’m not sure whether you’ve had time to review our previous email yet but I thought I’d give you a further update our end.

Things are progressing well for us with the conveyancing. My searches are back, mortgages is in-hand and enquiries are being finalised. This final point however has flagged up an issue with the lease term that we need your help with.

My solicitor has spotted that the lease term left to run is not the X years that I was told when I put my offer in, it is in fact X years.

I'm sure you'll appreciate that when paying the current asking price of the property, I need to ensure that the property doesn’t have a short lease.

The challenge for us all is that any buyer looking to buy this property will have an issue over the short lease and for some mortgage lenders they may not lend based on the remaining lease term.

We are very disappointed to have been informed that the lease term was X years by AGENT NAME when I put my offer. We put in an offer for the full market value of the property based on the lease being X years. On your statement I was buying a leasehold with X years I paid for a number of costs and if this matter doesn’t proceed, because of your error in the way the property was sold to us by AGENT NAME, we have been put at a financial loss to the sum of £X.

We are still very keen to buy the property and will be looking to exchange over the next few weeks, however we need to address the short lease by either:

the seller agreeing to extend the lease before we complete (not our preferred choice as we’ll need to wait for the legal work with the freeholder); or

we agree a price reduction to the extent of the costs to extend the lease in 2 years’ time when we will be eligible to extend the lease under the leasehold reform act. We will need to get the lease valuation from a surveyor to understand how much the cost will be to extend and this would need to be covered by the seller along with the extension premium and costs to pay for the freeholder to do this (You’ll appreciate that we are paying full market price for a property that is going down in value with each year that goes by).

We hope that this matter can be addressed with the seller as we have gotten so far through the process and are close to being ready to exchange. Sadly as all buyers are going to come up against this challenge with the short lease we see our solutions above as the best opportunity for this seller to overcome this short lease hurdle.

We look forward to hearing back from you before the end of this week so that we can all prepare to move forward quickly.

Kind regards,

The key thing to remember is that anyone buying the property will have to deal with the short lease. The challenge is if the seller didn't know they have a short lease and are left having to accept they have to pay for this to be extended or risk not being able to sell. For some sellers this may mean they are no longer in a financial position to be able to sell and will have to pull their property from the market.

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