Leases can (at a cost) be extended (see Lease Extensions below). However, if you are hoping to buy a property with a relatively short lease (less than 80 years remaining, say), you should take advice on whether you would be able to extend the lease, and how much this would cost. Lenders will normally require leases to extend for at least 40 years beyond the end of the mortgage, as a minimum, because the value of the property will become lower as the remaining period of a lease gets shorter.
- Mortgage Lender – Many lenders will be reluctant to lend on flats with short leases. In the past the cut off point was usually in the region of 70 years, but since changes in legislation a number of lenders now consider a short lease as being less than 80 years
- Buyer - in this case a buyer might well proceed with the purchase, given that they can raise a mortgage on the flat. But they must consider what the situation will look like if they propose selling in say 5 years. Further, when purchasing a flat with a short lease you will have to consider how much it will cost to obtain a new lease and factor this into your calculations when considering how much you should pay for the flat with the existing term of the lease
- Conveyancer – as you will see from the above, the length of the term is something that a conveyancer must be concerned to ensure is adequate. You will see that as the length of the term decreases, over time, conveyancers will be cautious in advising prospective buyers about the wisdom of proceeding.
- Lease extensions – the problem of the ‘short lease term’ can be and often is resolved. Provided certain criteria can be met, it is possible to obtain a ‘lease extension’. The procedures for dealing with an extension are quite involved, and are not always capable of being completed within the timescale of the usual purchase transaction. However, it is always worth making an enquiry of the landlord as to whether or not they would be willing to extend the term, and the cost of doing that. In many cases the cost of that extension can be negotiated with the seller. This is the ‘market forces’ way of extending a lease.
All too often there is time pressure – for example a buyer who is insisting on a new lease term before they will proceed. As a rule, we believe that you can expect landlords to exploit that time pressure to their advantage. The current owner runs a grave risk of paying a figure greatly exceeding the valuation figure referred to above.
In order to decide if it makes sense to negotiate, we recommend that you consult a surveyor to give you advice on valuation and determine what the premium might be if you were to apply under the second method, the statutory method. Unfortunately we are not qualified to give that advice. Even if the figure advised by your surveyor is close to or equals the sum offered by the landlord you would have the comfort of having a professional opinion on the sum you are proposing to pay. Beware agreeing other ‘new’ terms – for example increased rent – given that under the statute the new lease would not be at a nil rent on the same conditions as the old lease.
The method of extending a lease is contained in the Commonhold and Leasehold Reform Act 2002, and this legislation sets out the procedures which must be followed by a flat tenant to claim this right. As a qualifying leaseholder you will have the right to claim an extension of your existing lease of an additional 90 years at a peppercorn rent (ie rent free).
If there is no time pressure, we recommend that you should instruct a chartered surveyor to prepare a formal valuation for a new lease under the 2002 Act. His costs will be in the order of £200-£300 in our experience. That valuation figure is based on formula and will constitute your offer to the landlord for the new lease. The landlord has two months to decide if he agrees – if he does not, the matter will be decided by the First - tier Tribunal (Property Chamber).