As the length of the unexpired term of a lease gets shorter, the premium payable to extend the lease increases. Therefore a short lease can have a detrimental impact on the value of a flat.
An owner of a leasehold property therefore should not allow the term of their lease to drop below 85 years and certainly not below 80 years as once this happens a liability to pay ‘marriage value’ arises and it becomes more expensive to extend. In addition, when purchasing a leasehold property, many mortgage lenders will not lend if the term of the lease is less than 70 years.
Buying a Property with a Short Lease
If you are buying a property with a short lease length then you may want to explore the option of a lease extension under the Leasehold Reform, Housing and Urban Development Act 1993 (for more detail see Lease Extension Guidance).
If a prospective buyer is looking to purchase a leasehold property and the lease term remaining is low, it is advisable to ascertain whether the seller of the property is willing to serve a notice to extend the lease and assign the benefit of the notice to the buyer. This enables the buyer to assume the seller’s rights to a long lease and pursue the lease extension without having to wait two years to qualify.
If the seller agrees to serve notice, the buyer will need to obtain a valuation from an expert surveyor as to the likely cost of the premium for a new lease. The suggested premium in the notice must confirm the lowest possible price that the buyer is prepared to pay for the extended lease. Buyers should be aware that this is not the final price they will end up paying, it is a starting point for negotiation with the landlord.
The notice of claim for a lease extension is usually served by the seller on, or after exchange of contracts. Upon completion, the seller and the buyer execute and enter into an assignment of the benefit of the section 42 notice which essentially enables the buyer to step into the seller’s shoes and continue with the lease extension process as if the buyer had owned the flat for two years.
Selling a Property with a Short Lease
If you are selling a property with a low lease length, you have two options:
- Start the lease extension process by serving a formal notice of claim on your landlord. If you do not find a buyer then you will have to continue with the claim and you will be responsible for paying all the costs associated with the lease extension.
- Find a buyer and agree that upon entering into exchange of contracts you will serve a formal notice of claim on your landlord (i.e. start the lease extension process). On completion of the sale you will then assign all your rights to the new buyer to continue the claim going forward. Subject to negotiations between the parties, you will not be responsible for paying any costs associated with the lease extension claim.