Should I buy a flat with a short lease?
Nearly all the 4 million flats and apartments in the UK are leasehold properties, with the lease starting when the property is newly built. The length of the original lease can vary dramatically – from as little as 99 years right through to 999 years. 125 year leases are also commonplace.
Leasehold is an essential solution for blocks of flats and properties with communal areas and gardens where flat owners rely on each other for maintenance and support. However, as the remaining term of the lease goes down a number of issues arise – properties with less than 80 years on the lease become less valuable and hard to mortgage.
Many of the flats built in the 1960’s had original lease terms of only 99 years, and now 50 years later, these leases are now down to 40 years or so remaining. These properties cannot usually be mortgaged even for short terms and when they become available for sale, are offered at prices significantly below the market value for similar flats with long lease terms remaining.
So, are they a good buy for an investor?
The good news is that there is a statutory right to extend a lease. The Leasehold Reform Act 1993 is legislation which allows a lease extension for an additional term of 90 years. The ground rent is reduced to a peppercorn when the extension is granted, which is basically the same as being rent free. Note – the additional 90 years is in addition to the present unexpired term.
However, a leaseholder only acquires the statutory right to extend their lease once they have been the registered owner with the Land Registry for two years. So if you are buying a short lease flat, your solicitor will advise you to make sure the existing owner has the right to kick off the extension process before the sale is complete. Once the tenants Initial Notice has been served it may be assigned with the lease when the flat is sold.
Some freeholders may be willing to grant an extension without the leaseholder going through the statutory process, which can be time consuming and expensive. However, professional advice from both a lawyer and a surveyor specialising in dealing with the valuation of lease extensions is essential!
The Government publishes a very useful guide to lease extensions which can be found here.
This online calculator helps you to estimate the cost of extending a lease.
It allows you to look at the effects of the remaining term, the property valuation and the final valuation once the extension goes through.
Are they a good investment proposition? The answer is a qualified YES.
They can be a great investor proposition if you are able to buy at the right price for cash and see the process through.
The other really great news is that you can rent the property immediately for full market value while the lease is being extended – so the initial yield is usually excellent and there is a significant rise in value to look forward to once the lease extension is complete.
If the flat is part of a house, or one in a block of flats, a way of reducing costs could be to club together with other tenants to buy the freehold.
If there are just two of you in a converted house you both need to agree to buy in order to force the landlord to ‘enfranchise’. If there are more than two flat owners, then you need a 50%+ majority to force the landlord to sell. Again take advice.
Contact Trigg & Co on 01983 525710.
We will be pleased to help and to put you in touch with the right professionals.