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Understanding the problems of owning a short lease property

Continuing our series of blogs highlighting property problems, North West valuer Alex Senior considers the implications of owning a property with a short lease.

How long is left on your property’s lease? This is definitely something you need to monitor carefully. The reason is that a short lease reduces the value of your property. And by “short”, I mean anything less than 80 years.

If you own a leasehold property you will no doubt understand the difference between leasehold and freehold but for anyone considering a property of this type, here’s a quick explanation.

If you own a flat or maisonette in England or Wales, this will most likely be a leasehold property. In the North West, some houses are leasehold, too, although this is rare in the rest of the country. There is no leasehold in Scotland.

Unlike a freehold property, where you own the building and the land it stands on, with a leasehold property you effectively rent it from the freeholder (also known as the landlord) over the period of the lease, which is usually 99 years but can be anything up to 999 years.

With a leasehold flat, you usually own everything within the four walls of the property you occupy but not the rest of the building.
With a leasehold house, you own the building but not the land it sits on.

In return for the right to occupy the parts of the building and land you do not own, ground rent is charged. This is usually quite low but in the past few years there has been a trend for higher ground rents which grow exponentially over time, so watch out for these. The service charge is separate and contributes towards the maintenance of the building and grounds.

Something to consider with leasehold is that, as the lease gets shorter, the property’s value reduces. Most mortgage lenders are unwilling to offer finance on properties with a short lease, which limits you to cash buyers.

As the law currently stands, when the lease falls below 80 years, the value drops considerably. Extending the lease at this point becomes more expensive due to the confusingly-named ‘marriage value’.

Marriage value recognises that the property’s value has only increased because the freeholder has agreed to the extension so entitles the landlord to half of the ‘profit’. In other words, it will cost much more to extend your lease.

To oversimplify – as there are other factors at play – if extending the lease on your short-lease property increases its value by £20,000, you must pay the freeholder an additional £10,000 in marriage value to extend the lease. The shorter the lease, the more value is added by extending it so the more you have to pay the freeholder in marriage value. Technically, if the lease runs out, the property reverts to the freeholder, although you do not need to leave unless you choose to or you receive notice from your landlord.

If you haven’t bought a leasehold property yet, the wisest move would be to look for one with a long lease. Yes, leases can be extended or purchased (this is called leasehold enfranchisement) but not until you have owned the property for two years. At that point, you have the right to add 90 years to the remaining term of the lease.

It’s a complicated system – the Law Commission states that the current leasehold enfranchisement system is the result of more than 50 Acts of Parliament – but is currently under review. On 21st July the Law Commission published a report into leasehold enfranchisement, which includes proposals to scrap the two-year requirement and abolish marriage value.

You can find out more about leasehold properties from the Leasehold Advisory Service but if you have a short-lease property, you need to weigh up your options. If you’ve owned it for two years or more, you could start the lengthy extension process now before your lease gets any shorter… or you could keep your fingers crossed and hope the law changes in your favour, enabling you to extend your lease without paying marriage value.

A third option is to cut your losses and sell your property now in one of our auctions, giving you maximum reach to a huge network of investors who have experience in this area. This will give you the best chance of getting the best possible price for your property.

To find out more about auctions or to request a free, no-obligation auction valuation of your property, please do get in touch by clicking here or calling the team on 0800 046 5454.