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Should I buy a flat that has a short lease?
So, you’ve found the perfect flat for you; it’s in the right area, close to amenities, schools and transport links, its got a lovely new kitchen and it’s within your budget. But then you notice that the lease is short.
What does this mean and what should you do?
Buyers often have a list of ‘wants’ when it comes to looking for a new home but many of these are cosmetic. Buyers often forget that one of the most important things to consider when buying a flat is the unexpired lease term. Ideally it should be over 83 years when you complete.
A lease is a diminishing asset and it continues to expire day by day. In lease terms, a “short” lease is anything under 80 years as once a lease hits this crucial 80 year mark it becomes significantly more expensive to extend with the premium payable to the freeholder rising sharply, literally overnight, and continuing to rise all the while the lease continues to run.
Leases with less than 70 years remaining can prove more problematic as mortgage lenders do not like them as they do not offer very good security for the loan. Once a lease drops below the 60-65 year mark lenders may refuse to lend altogether.
So why should the lease be over 83 years?
The Leasehold Reform, Housing and Urban Development Act 1993 provides that Flat Owners who have owned their flat for at least 2 years are able to claim a statutory lease extension of an additional 90 years on top of the unexpired term at a peppercorn ground rent. If the lease has 83 years or more when you complete on your purchase then you know that you will be able to force a lease extension once the lease still have 80-81 years remaining; i.e. while is it much cheaper to do. As such, you have the certainty of being able to obtain a lease extension in the future at a cheaper price.
It may be possible for the seller to agree a private lease extension with the freeholder as part of the sale, meaning that they can transfer the property to you with a new 99 year lease. However, the seller will not be bound by any new terms once they complete the sale. The risk is that the seller agrees to a private lease extension (essentially a top-up back to 99 years) at a lesser premium than the statutory alternative (in an attempt to keep their expenditure as low as possible) but accepts new high ground rents rising throughout the duration of the lease. Any buyer will be bound by the new terms once completion has occurred; there is no scope to undo a bad bargain that is essentially inherited. The private process is very risky as part of the conceyancing process and embarking on it is only really advisable if the seller has not owned the flat for the required 2 year period to be able to commence a statutory claim. If the private route is the only option available then it is imperative that the buyer sees, and approve, a copy of the proposed new lease prior to exchanging contracts as once the buyer exchanges, he/she is bound by the terms in any Lease.
Before agreeing to purchase a flat with a short lease seek specialist legal and valuation advice so that any problems are highlighted and fully explained to you as once you go ahead and complete it is too late.