Selling A Property On A Short Lease

One of the most common questions asked by leaseholders when selling their property is ‘should I sell my flat with its current lease, or should I extend it and sell it with a longer lease?’

As with everything in life, it depends massively on your personal circumstances, but what follows is some general advice that couples that fact with the realities of the property market and the lease extension process itself.

The Length of Your Lease

The number of years remaining on your lease is always going to be your starting point, but what constitutes a short lease?

The Leasehold Reform Act states that marriage value is payable once the lease hits 80 years, but in reality buyers in the market place are enquiring about lease extensions on properties all the way up to 100 years and sometimes, beyond.

In a buoyant market, there may be plenty of buyers for a desirable property on a 99 year lease. Outside of that, an average buyer is almost certainly going to factor in a reduction, however small.<

If your lease is above 80 years, then your chances of acquiring an informal lease extension (i.e. without the need to serve a formal notice) for a reasonable sum and in a short space of time is significantly higher than if the lease is below that length.

It’s still very much possible with a lease in the 70s, and even below that, but it will be increasingly more difficult the shorter the lease gets.

Your Freeholder

Selling A Property On A Short Lease

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The desire of your freeholder to grant an extension, without the need to serve a notice (S42), is your next most important consideration.

Mrs Smith who lives upstairs and owns only this freehold is likely to be more amenable than a large gentrified and wealthy freeholder who owns a quarter of the borough.

The best approach is to write to the freeholder (or their management company) and enquire as to the cost of an informal extension.

You will either be told to serve notice (at which point your route is clear), presented with an offer, or asked to pay for their surveyor to advise them in order to for an offer to be put to you.

If and when you receive an offer, you should instruct a Chartered Surveyor to undertake a valuation report which will allow you to discuss and contrast the offer.

The Offer

The offer from your freeholder is almost certainly going to be higher than what your surveyor believes to be reasonable so you need to consider what specific parts are unreasonable?

Start with the lease length. An extension back to 99 years (as I have alluded to above) is never great. Mathematically and in the market, there is not a lot of difference between a lease of 125 years and one that has received a statutory 90 year extension.

The second consideration, and one that has been attracting a lot of negative media attention recently, is the ground rent.

Nationwide became one of the first of the top lenders to clamp down on excessive ground rents stating that “the maximum acceptable starting ground rent on all new build leasehold properties will be limited to 0.1 per cent of the property’s value”. Is this indicative of how all ground rents will be judged in the future?

Will properties slowly become mortgageable as the criteria for ground rents tighten? Who knows, but if you really want to err on the side of caution, keep your ground rent low, or insist that it is zero (peppercorn).

Introducing a ground rent can shave several thousand pounds off the cost of your extension, but the real consequences of these decisions are now only starting to show.

Cost of the Formal Route

Selling A Property On A Short Lease

Any informal offer should be set in contrast to what could be achieved via the formal route, plus costs.

You will struggle to keep fees much below £4,000 – £5,000 via the S42 route, as the leaseholder has to not only cover their own surveyor’s and solicitor’s costs, but also those same costs for the freeholder.

This figure increases significantly if you head towards a Tribunal hearing, even if you end up settling and not actually going.

To sell With a Short Lease

The alternative to trying to extend your lease prior to selling is to simply sell the property with its current lease.

The Act does allow the right to a S42 lease extension to be passed onto the incoming purchaser, but you will be expected to take a hit on the price whereby the buyer will look at the cost of extension, professional costs and the general inconvenience and stress of having to do this themselves.

On genuinely short leases, you will almost certainly be overall better off, if you extend yourself, pay the premium yourself and then sell the property for its full long lease value, owing to the fact that marriage value is taken at 50%. If in doubt, instruct a surveyor to provide you with a valuation.

You

As mentioned at the start of this piece, the circumstances of the sale may be more relevant than all of the above factors combined.

You may be lucky enough to have a very keen buyer who has found their dream flat, and would be willing to accept a lease of 99 years, but equally you may not.

How quickly do you need the extension? Can you even wait 6 months to go through a formal lease extension for a guaranteed 90 plus year and peppercorn ground rent?

Have you found out that your lease is short 2 weeks before the sale plans to complete, in desperate need and would pay over the odds for a deal?

Again, liaise with your surveyor. Inform them what your priorities are. An experienced surveyor will have dealt with all manner of situations and negotiated all manner of bespoke deals and hopefully, they can find the right one for you.

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