Short lease - serious issues?

RoisinDove

Hi everyone,
I have started looking at flats to get an idea of what is available in my price range and have seen a couple of gorgeous places which have a lease < 100 years (85 and 97 years to be specific). What does this actually mean in practice? I know that the flat will be less attractive to buyers when I want to sell but am unsure about how the procedures work for extending the lease. What kind of cost is involved, or does it depend? Can I make an offer on a property subject to the lease being extended by the current owner, or would I need to buy it first and then try to sort it out? 

Owleyes00

You have to own a property for 2 years before you can apply to extend the lease. It is possible (although by no means a guarantee) that you could ask the sellers to start the process of extending the lease and then you could take the process over, circumventing the 2 year rule.

As for the cost, how long is a piece of string? Anywhere between £5,000 and £20,000.

Are you a cash buyer? You might find some mortgage lenders aren’t too keen on the 85 year one.

GDB2222

85 years is mortgageable with most lenders. 

As to cost, have a look here:
https://www.lease-advice.org/calculator/

That's a reputable website, so you can rely on it at least as much as you can rely on advice from me.

NameUnavailable

You need to be careful if the lease is close to 80 years and avoid if under 80, as that is the point at which the cost to extend becomes significantly more expensive (and many lenders won't lend which is why most flats with short leases are sold at auction to cash buyers).

NameUnavailable

You also want to avoid flats with ground rent over £1000 in London or £250 elsewhere as they become an AST and you have fewer legal rights - again many lenders won't lend on them (or if there is a doubling ground rent clause in the lease which means the ground rent will increase to exceed those levels in the future - there are some exceptions, best to check with your lender as to their rules).

princeofpounds

Basically, anything under 80 years becomes a problem because if you want to extend the lease from a position of under 80 years remaining, you have to pay something called marriage value. It basically recognises that the freeholder has leased you an asset, and if you extend that lease, the freeholder loses the opportunity to recover that asset in the future as originally expected. So they are due some compensation for that. In a way, it's remarkable that they aren't due any proper compensation with extensions for leases over 80 years, but I won't get into that topic here.

Although the costs of a lease extension step up at 80 years, it's not initially a huge amount of extra money. But crucially the expense starts to creep up at an accelerating rate as the remaining time goes on, and so the property is going to become a depreciating asset. No-one wants to lend money for 25 years at low rates with the security of a depreciating asset, so it becomes impossible to mortgage (or re-mortgage) the property.

Neither of these two flats you mention are close to 80 years, so practically there is little issue right now regarding marriage value. However, with the 85 year flat, for example, you will want to have a lease extension completed in the next 5 years. You could leave it longer, but it's not a sensible idea as you will unnecessarily accept that step-up in cost, and you will not be able to re-mortgage when the time comes. So you should absolutely budget for that.

Apart from this issue of marriage value, the other main variables for how much it costs to extend a lease are a) the value of the property, b) the remaining length of the lease and c) ground rent, including any escalation clauses if applicable. Higher/Lower/Higher and faster. You can get a very good sense of how much it costs to extend a lease over 80 years from online lease extension calculators, as long as there is no ground rent escalation. If there is, the maths is a bit more complex.

Don't forget that there are legal fees involved too!

There are two ways to extend a lease. One is 'informal'; negotiate directly with the freeholder, reach an agreement, appoint lawyers and extend the lease for a payment. This has the advantage of being faster, easier and cheaper on legal fees. It has the disadvantage that the freeholder can ask whatever terms they like.

The other route is the formal 'statutory' extension, which you can access after 2 years of ownership. This involves going to a Tribunal, who will force an extension according to specific rules laid out in statute (law). At the moment, you get 90 years extra, zero ground rent, and the price is defined by a formula. This has the advantages that you will always get your extension, and the price is basically defined by a sensible formula (although the precise input for property value can vary a bit according to the opinion of the tribunal). The disadvantage is that it is slower and involves more legal fees.

Normally, something like the following process will happen. You will ask for a lease extension from the freeholder. You might get a silly offer back (sometimes, even a sensible offer). You refuse any silly offer, pointing out you can pursue a statutory extension instead if the offer is more expensive. The freeholder realises you know the process, and returns with a more sensible offer, a bit higher than the statutory process price perhaps, but more convenient with lower legal fees. You accept and get it processed. But situations can vary (absent freeholders, crazy freeholders, strong differences of opinion over property value etc.) so sometimes you need to resort to Tribunal.

Yes, you can ask that the vendor pursues a lease extension as part of any purchase. If they start the statutory process, that can even be legally assigned to you part-way through so you do not need to wait for it. However, I would expect the 97yr flat to say 'no, sort it out yourself in the next 17 years'. I would expect the 85 year flat to be more open to the idea, even though they are not right up against the deadline. But if you do that, you will basically have to fund the extension with a higher offer, or offer less without an extension. The question is whether the property is already priced for requiring an extension in the next 5 years or not. Use the lease extension calculators to find out the cost, as I mentioned earlier.

Demanding an extension can also slow things down and make your offer less attractive from a perspective different to price. Some vendors may care, some may not.

LAD917

A 97-year lease shouldn't be a concern at all - you have 15+ years to deal with it and a statutory right to extend.  Anything above 90 is (generally) not worth worrying about.  85 is marginal, but I'd do it (factoring in the likely cost of extension) for a property I liked otherwise.  83 is my usual cut-off point.  80  to < 83, I'd exercise extreme caution and insist that the vendor start the extension process.  Below 80, forget.

As others have said, the calculator linked above is your friend!  Do note that the calculator may not work correctly, and the estimates may be off, if there are ground rent escalation clauses -- e.g., doubles every 10/15/25 years.

RoisinDove

Thanks for the detailed replies, everyone! I had been advised that anything under 100 years is an issue, but that doesn't really seem to be true? I decided not to offer on a flat because of the 97 year lease, even though it was a beautiful flat, thinking that could give me problems down the line, or make it less attractive to buyers. This is my first property, so I am aiming to be there about 5 years before moving on but I guess you never know what will happen. 

RoisinDove

NameUnavailable said:

You also want to avoid flats with ground rent over £1000 in London or £250 elsewhere as they become an AST and you have fewer legal rights - again many lenders won't lend on them (or if there is a doubling ground rent clause in the lease which means the ground rent will increase to exceed those levels in the future - there are some exceptions, best to check with your lender as to their rules).

Oh really? I had no idea about this! This applies to ground rent only, right? There's no similar thing for service charges (which almost always exceed £1000 in London)?

LAD917

No, there's no similar issue for service charges, though the lender will take the service charge into account when determining whether you can afford the property.

Good for you for asking about lease lengths, ground rent, and service charges.  Many first-time buyers do not, and many estate agents say it's a matter for your solicitor (and then refer one who gives them a finder's fee).  It's always better to have this information before you make your offer and IMO it should be required by law in all real estate advertisements.  You're far better to be too careful than not careful enough. Best of luck!

princeofpounds

RoisinDove said:

Thanks for the detailed replies, everyone! I had been advised that anything under 100 years is an issue, but that doesn't really seem to be true? I decided not to offer on a flat because of the 97 year lease, even though it was a beautiful flat, thinking that could give me problems down the line, or make it less attractive to buyers. This is my first property, so I am aiming to be there about 5 years before moving on but I guess you never know what will happen. 

No, it's not true that 100 is an important cut-off point. 80 is important. ~83 is important for the reasons LAD917 mentions (to be frank with Covid delays to court system I'd add another year to that right now, just for the sake of caution, not that it seems to be such a problem for Tribunals).

Also agree with LAD on the issues of the £250/£1000 ground rent problems, and the problems with doubling ground rents, but didn't include them initially to avoid complicating things for you. Estate agents can be evasive about giving full details up-front, and properties are often marketed with incorrect lease details as people can be lazy or stupid. It can always be checked by downloading the title deeds for £3 from the land registry. Worth doing even before you make an offer, just to check the main terms.