Are you a Leaseholder with a Short Lease?

What constitutes a short lease? 
A lease length that drops below 80 years is considered a "short lease" and can be extremely expensive to extend. This is because of the payment of marriage value is essentially that value attributed to the extended lease value and from which the landlord benefits. As a rule, the shorter the lease, the more expensive it is to extend. It is important to be aware of the future implications that can arise if a property is sold with a short lease.

However, the Leasehold & Freehold Reform Act which was one of the last pieces of legislation to make it through Parliament before a general election on 4th July, does make provision to abolish marriage value. This would make it cheaper for leaseholders with fewer than 80 years to extend their leases. However, frustratingly marriage value wont kick in with immediate effect and there is no specific timeline in place before leaseholders can benefit from the reform.

What are the benefits of purchasing a property with a short lease? 
Properties with short leases are appealing to those retired or without dependents to leave the asset to. They are often much cheaper than leases with a longer term. Short leases are also attractive for buy-to-let investors.

What are the challenges with a short lease? 
Decreases in value. A short lease has significant impact on the market value of property and increases that perception of a “wasting asset.”

Obtaining a Mortgage 

A lease below 80 years is less attractive to mortgage lenders, and they are generally reluctant to lend where the lease is too low. In some cases, obtaining a mortgage may be impossible. This is due to the overall risk to their security and issues that might arise on re-sale. Given the difficulties in obtaining mortgage finance, low lease property is often sold in an auction or through an estate agent where sales are limited to cash buyers. In the likely event that a mortgage lender accepts property with a short lease, the repayment period is then likely to be shorter, and the repayments higher.

More costly to extend

Because of the payment of “Marriage Value,” short leases can be extremely expensive to extend both in a statutory and voluntary setting.

Marriage Value 
“Marriage Value” is a term specific to Leasehold Reform (granted in different guises) and applies when a lease drops below 80 years. Generally, if a lease is below 80 years, the freeholder is entitled to the benefit of the marriage value. Marriage value is referred to as the increase in the value of a property following the grant of a lease extension. The landlord is typically entitled to 50% of this increase which is considered by specialist valuers when calculating the cost of extending a lease.

What rights are available? 

Formal Lease Extension 
The Leasehold Reform Housing & Urban Development Act 1993 (“the Act”) gives leaseholders the statutory right to extend their lease subject to qualification criteria being met. There is a set timetable to follow and a strict valuation structure. Freeholders cannot legally refuse a leaseholder’s request to extend their lease under the Act unless and in some way the application is either defective or the qualification criteria not met.

The following qualification criteria must be met to qualify:

• The lease must be a long lease i.e. originally granted for 21 years or more.
• The lessee must have owned the property for two or more years (no requirement for occupation of the property)
• 100% ownership achieved through a Shared Ownership Scheme

Extending a lease under the Act will allow add a further 90 years to the unexpired term of existing lease and reduce the ground rent to a peppercorn. The Act sets out the valuation process for calculating the premium payable. In addition to the surveyors’ fees and legal fees., which must also be met by the applying lessee.

Informal Lease Extension 
Outside of the Act, leaseholders can only extend their lease if the freeholder agrees by way of voluntary lease extension. In an informal negotiation, there would be no security in terms of costs, or those terms granted.

If you'd like to have a chat or need some advice on this, please call us on 0208 870 5800 or get in touch here.

We cover Wandsworth, Putney, Southfields, Tooting, Clapham Junction, Balham, Earlsfield, Battersea, Nine Elms & Wimbledon. We also venture further out towards; Mitcham, Hackbridge, Wallington, Purley and Sutton.