Katie Cohen explains why flat owners should make sure they understand the implications of lease length.
Flat owners do not always appreciate the importance of lease length and it is often not until the decision is taken to sell their flat, that the full implications of a short lease become clear. In general terms, the longer your lease the better.
Leases with more than 100 years remaining are not normally a problem when it comes to selling your home. However, if your lease has less than 80 years left to run you may find yourself with a problem – as the length of the unexpired term of a lease gets shorter, the premium that you need to pay to extend it increases. In order to extend a lease where there is less than 80 years remaining, the premium (or payment) you will need to make to the landlord will have to include 50% of the marriage value (see below for an explanation of what this means) and so could prove costly.
If your lease is even shorter, you may find it difficult to sell your flat because many mortgage lenders stipulate as part of their conditions to potential buyers that there must be a minimum term left on the lease. The length of lease required can vary, but the majority of mainstream mortgage lenders generally refuse to lend on lease terms of less than 55 years. Different lenders have varying criteria, but prospective purchasers will be less likely to accept a shorter lease and may find it difficult to secure lending which means that a flat with a short lease is only likely to be of interest to cash buyers. Re-mortgaging may also be prohibitive until the lease term is extended beyond the minimum term your lender requires. Re-mortgaging may well be possible without an extended lease but the consequence may be a higher rate of interest costing you more in the long term.
All this means that it pays to be aware of the length of your lease. However, if your lease is getting close to the 80-year threshold, don’t panic – assuming that you qualify, you are entitled under the Leasehold Reform, Housing and Urban Development Act 1993 to extend your lease by 90 years in addition to the unexpired term at a peppercorn ground rent (ie, nil), in return for a premium. To meet the criteria, the flat must be held under a long lease (ie, originally granted for a term of more than 21 years) and the flat must have been owned and registered at the Land Registry for more than two years.
In granting the lease extension, compensation is payable to the landlord for the reduction of his interest in the property. This comprises the loss of ground rent for the remainder of the term, plus the reversionary value of the property once the lease expires. Where the existing lease has less than 80 years unexpired, you also pay the landlord 50% of the marriage value.
Can I sell a flat with a short lease?
If you want to sell a flat with a short lease, it is possible to serve a Section 42 Notice for a lease extension, and to then pass this on or ‘assign the benefit of the Notice’ to the buyer upon completion. This makes the property a far more appealing proposition to a buyer but he or she must take advice from a specialist enfranchisement advisor as any mistake made during the process can be fatal for the claim and result in a purchaser taking on a flat that will be even harder to sell in future.
The landlord is usually served with a section 42 notice after exchange to ensure the buyer is committed. At completion, the parties execute a Deed of Assignment of the Benefit of the Notice. This is not the same as a Deed of Assignment. The Deed enables the buyer to step into the seller’s shoes upon completion and continue with the lease extension process as if the buyer had owned the flat for two years.
Can I buy a flat with a short lease and extend it at the same time?
There are many reasons why some purchasers are keen to buy short leasehold property. By using the 1993 Act it is possible to spread capital payments across two transactions, which can reduce the amount of Stamp Duty as the tax is paid per transaction and not in aggregate. The market for short leasehold property is quite specialised and can sometimes mean there is less competition for the purchase of the flat. Also, marriage value is at its greatest when the lease is between 30- 40 years unexpired, so the potential benefits are at their peak.
Ideally a prospective buyer is looking to buy a flat where the seller has owned the lease for more than two years. Note that they would need to wait for two years from the date of registration at the Land Registry should they decide to extend the lease after the purchase of the property.
Many flat owners don’t ever consider the length of their lease until they attempt to sell or re-mortgage their flat. Short leases affect the value and saleability of a flat and can cause issues with mortgage lenders. So don’t wait until you are thinking of moving – check the length of your lease before it becomes a problem.
For further advice and information, please contact Katie Cohen,
Partner Leasehold Enfranchisement, Child & Child.
