Is It Risky To Buy A Flat With A Short Lease?

Nikka Sulton

Is It Risky To Buy A Flat With A Short Lease?

Properties with short leases are becoming increasingly uncommon, leading to a lack of awareness among buyers about their implications. Often, buyers only realize the consequences of purchasing a short-lease property late in the buying process, which can lead to unexpected complications.

Flats are the most common property type affected by short leases. If you’re considering buying a flat with a short lease, it’s crucial to understand what this means. Short leases can significantly impact the property’s value, the ease of obtaining a mortgage, and future resale potential. The term “short lease” typically refers to leases with less than 80 years remaining, and buying such properties often requires careful consideration of additional costs, such as lease extension fees, which can be substantial.

If you’re on the hunt for a flat and notice some properties are priced much lower than others, it may be due to a short lease. These properties can appear attractive due to their lower prices, but the financial implications and potential legal complexities of extending the lease or dealing with lease renewal should not be overlooked. Before proceeding, it’s advisable to consult with a solicitor or property expert to fully understand the long-term costs and legal responsibilities associated with purchasing a short-lease property.

What is classed as a short lease property?

A short-lease property is typically defined as having 70 years or fewer remaining on its lease. As the lease term diminishes, so does the property’s value. Despite this, properties with leases of even five years or less can still be found on the market. This scenario is more common with flats in urban areas, where leasehold flats are more prevalent than houses.

When looking at buying a flat with a short lease, thorough research is essential. This includes understanding the legal aspects of purchasing short-lease properties and evaluating the specific property to ensure you are aware of the implications. Buying a short-lease property often means facing additional challenges, such as higher costs for extending the lease and possible difficulties in obtaining a mortgage.

Risks associated with a short lease

Short leases often arise when the owner cannot afford to extend their lease, and they are frequently found in less affluent areas. These properties tend to be in less than ideal condition and may require significant and costly refurbishment to make them habitable. Additionally, the expense of ground rent and maintenance fees specified in the lease terms can be substantial, adding to the overall cost.

It’s important to consider that even if you do not plan to renew the lease and intend to let it expire, there are numerous associated costs. The primary risk of purchasing a property with a short lease is its declining value. As the lease term shortens, the property’s value decreases, making it less attractive to potential buyers and mortgage lenders. Most financial institutions will not offer mortgages on properties with less than 70 years remaining on the lease, restricting the market to cash buyers only.

Furthermore, selling a property with a short lease can be challenging. The diminishing lease term makes the property less appealing, reducing its market value and attractiveness to both buyers and mortgage companies. This limited appeal can make it difficult to resell the property, leaving potential buyers to consider the long-term implications and financial burdens associated with a short-lease property.

Benefits of buying a property with a short lease

Flats with short leases might appeal to retired individuals and those without dependents, as they are less concerned about leaving an asset to heirs. These properties offer a lower upfront cost and can be suitable for people looking to manage their finances effectively in retirement without the long-term obligations of property ownership.

In addition, buy-to-let investors often find properties with short leases attractive. They can earn a return on their investment by renting out the flat for the remainder of the lease term. After a few decades, when the lease expires, they simply allow it to revert back to the freeholder, having maximised their rental income during the lease period.

What happens if a leasehold runs out?

When a leasehold expires, ownership of the property reverts to the freeholder, ending the leaseholder’s tenancy. The freeholder then gains full control of the property. Despite this, you are not automatically required to vacate the premises unless you or the landlord formally ends the lease agreement.

It’s possible to extend the lease, but it’s essential to understand that the cost of doing so rises as the remaining lease term decreases. The shorter the lease, the more expensive it becomes to renew.

Getting a mortgage on a flat with a short lease

Getting a mortgage for a flat with a short lease is very challenging. Typically, only specialist lenders will offer loans for such properties, and they charge much higher interest rates because of the increased risk.

If you’re considering purchasing a flat with a short lease, be prepared to pay cash. This can make the investment more viable, as conventional financing options are limited and costly.

Does it cost money to extend the lease?

Yes, the cost of extending a property’s lease can vary depending on several factors.

The process for determining the cost, known as the ‘premium,’ is clearly defined under the Act. This involves negotiations between the leaseholder and the freeholder, considering factors such as:

Reduction in the freeholder’s market value interest in the property after the lease extension.
Any additional losses the freeholder may incur due to the extension.
The ‘marriage value,’ which refers to the increase in property value resulting from the lease extension. According to the Act, when extending a lease with 80 years or less remaining, the freeholder is entitled to 50% of this increased value. Hence, leaseholders are advised to initiate the lease extension process when there are still 85 or more years left on the lease.

What about a mortgage on a flat with a short lease?

Buying a flat with a short lease is ideally done with cash whenever possible. Securing a mortgage for such properties can be challenging, as they often come with significantly higher interest rates compared to standard mortgages.

In the UK, most lenders consider leases with less than 75-85 years remaining as ‘short leases.’ However, the acceptable minimum unexpired lease term varies widely among lenders, so it’s essential to compare options or seek advice from a mortgage expert.

As mentioned earlier, one solution to dealing with a short lease is to negotiate with the current owners to extend it, if they are eligible. By offering to cover the extension costs as part of your purchase, you can avoid the complications of finding a mortgage lender willing to finance a property with a short lease.