How much does a short lease devalue a property?

Having a short lease can cause a whole lot of issues, especially if you want to sell your property. A shorter lease means a lower property value, higher lease extension premiums, and little desirability to prospective buyers.

Knowing the length of your lease is really important as a leasehold property owner. Not only because you lose ownership once the lease expires, but because a short lease seriously devalues your asset.

In this article we'll cover the length of a short lease, how much a short lease devalues a property, and what you can do to stop this from happening.

Freehold versus leasehold properties

A freehold property owner has outright ownership of the property and the land it's built on. As a leasehold property owner, you only own the property, not the land on which it sits. This means you have to pay the freeholder (or 'landlord') ground rent and service charges.

With a leasehold, you only own the property for the duration of the lease. Once the lease expires, you lose the right to live there and the property goes back to the freeholder's ownership.

What is a lease?

A lease is the contract between you and the freeholder. It outlines your rights and obligations as a leaseholder, including how much you need to pay for ground rent and service charges, and the landlord's responsibilities such as insurance and waste collection.

Your lease will give you the right to live in the property and sell that right to someone else, and usually lasts for a set period of 99-125 years (though it can last for centuries).

Most flats in the UK are leasehold properties because they involve multiple properties occupying the same piece of land.

Why does a short lease devalue a property?

If the lease drops below 80 years it becomes a short lease. A short lease devalues the property anywhere between 10-20%, whilst also increasing the freeholder's interest.

It's always better to extend your lease as soon as possible, because a shorter lease will increase the lease extension premium. This is because the freeholder has more to lose from a property with a short lease. For example, if the lease on your property is only 30 years, this means the freeholder gains outright ownership in 30 years. Getting a lease extension increases their waiting time before they're able to sell the property for the full value.

A new lease will also come with a peppercorn (zero to minimal) ground rent. If they've been charging any higher ground rents during the previous lease period, they'll lose this profit with a new lease. Not only would they lose that ground rent for one year, but for the extra years the lease has been extended as well.

Marriage value

Marriage value or marriage fee is part of the reason a short lease will devalue a property. Marriage value is the increase in a property's value after a lease extension, and the freeholder is entitled to 50% of that increase.

Mortgage issues

Many mortgage lenders won't lend on property leases below 70 or 80 years, so it becomes very difficult to apply for a mortgage if you own a property with a short lease. And even if you're able to get a mortgage for a short lease, you may struggle to remortgage at a good rate in the future.

Future saleability

Because many properties with a short lease are often not mortgageable, buyers are much more reluctant to invest in them. A potential buyer will also avoid short leases because they don't want these problems for themselves, especially if they want to sell in the future. And with the rules of supply and demand, if no-one wants your property, the value of the property will naturally drop.

Applying for a lease extension

A lease extension will add 90 years to the lease period. Under The Leasehold Reform, Housing and Urban Development Act 1993, you have the legal right to serve your landlord with notice for a lease extension after owning the leasehold property for two years. The freeholder is legally obliged to agree.

However, there are complications that come with a lease extension, particularly because of the professional fees involved. As the leaseholder, you are responsible for all legal fees and valuation costs that come with a lease extension.

Your responsibilities may differ depending on whether you're buying or selling a property with a short lease, but you do have different options.

The lease extension process

If you're going to organise the leasehold extension yourself, you should get a valuation from a professional. This will give you a good idea of how much you'll need to pay the landlord before the extension is granted. If you can't come to an agreement with your landlord about how much the lease extension will cost, you can seek help from the Leasehold Valuation Tribunal (LVT), who will give you an impartial judgement.

Generally speaking, there are two ways to extend your lease: formally or informally.

Formal route

This involves serving the freehold registered owner with a Section 42 notice. Included in this will be your right to ask to extend the lease as well as your offer of compensation. The freehold owner will then have two months to respond.

If the freehold owner rejects your initial application, the legal teams of both owners will have two more months to negotiate. After that, the application will go before the First Tier Tribunal who will then set the compensation level for you.

Informal route

This route follows the same procedure, just without the Section 42 notice. You can just open negotiations with the freehold owner, and if they don't want to engage in the informal route, you can then go down the formal one.

Extending the lease as a seller

Extending the lease as a seller means your buyer will benefit from the lease extension even though they themselves haven't owned the property for two years. The buyer pays for the lease extension premium, but they don't have to wait for the minimum two years to be eligible for it.

Inheriting short lease properties

If you inherit a property with a short lease, you can apply for a lease extension within two years of the Grant of Probate, and if the deceased owner owned the property for at least two years. But if the property is transferred into the names of the executors at the Land Registry, you will have to wait for the standard two years.

Extending the lease as a buyer

To avoid a delayed sale, buyers can apply for an informal lease extension straight after completion. This can be risky as the landlord can back out of the transaction, which leaves the buyer owning a short lease property without the luxury of extending the lease until they've owned it for two years.

It's often more advisable for buyers to ask for a lease extension at the same time as purchasing the property.

Buying a flat with a short lease

Buyers have a number of routes they can choose to take when purchasing a flat with a short lease.

Ask the seller to extend the lease before you buy or at completion

As the buyer, you can ask the seller to extend the property's lease and only buy the flat once it's completed. This means the seller would need to pay for the lease extension. If they can't afford it, they can use some of the money from your flat purchase, which is referred to as 'new lease on completion'.

This is a good option for those who don't want to be involved in the lease extension process. By the time you move in, everything will be sorted.

However, this might not be the best option if you're short on time. If the seller does a statutory lease extension this could take a year to complete, and you might not want to wait that long. Asking the seller to negotiate an informal lease extension with their landlord may speed things up, but you need to make sure you agree with the terms.

The seller might also not agree to extend the lease, and they're not legally obliged to. This could cause delays with the buying process.

The best thing to do is review it with your solicitor before buying the flat.

Ask the seller to start the lease extension process and then transfer it to you

This is a good option if you don't want to wait for the seller to complete the statutory process and you don't want to risk an informal lease extension.

This option may be slightly risky because you're buying a flat with a short lease, and inheriting an uncertain set of circumstances with regards to the lease extension. In this instance, make sure you seek legal advice before making your decision. Have a full picture of how much it will cost to extend the lease and amend your purchase offer based on that cost (along with the legal fees, conveyancing services and contingency fees for the risk of taking on a half-finished product). You'll also need to make sure mortgage companies are willing to lend for the flat with its existing lease.

Buy first, extend later

This option does what it says on the tin. You can buy the property with the short lease, and apply for a lease extension once you've owned the flat for two years. The risks of this route are similar to the previous option, but the process may be smoother if you're doing each thing step by step, rather than all at once.

How much do lease extensions cost?

The price of lease extensions can vary greatly depending on the length of the lease. A longer lease will be much cheaper than a shorter one, and if your lease falls below 80 years you could be looking at very expensive lease extension premiums. The cost of an extension for a lease with 79 years left could nearly triple the cost of a property with 82 years remaining lease term.

It's also important to keep an eye on the length of your lease if it's near the 80 year mark. For example, if your property has a remaining lease term between 83 and 100 years, you should consider extending it while you still own it. Even if you're planning to sell and move in a few years' time, short lease properties become much harder to sell, and the purchase price could be a lot lower if you fail to extend.

It can cost tens of thousands of pounds to extend the lease of a property, and you'll need to pay for the lease extension before you can put your property on the market.

Selling short lease properties at auction

If you're struggling to find a buyer for your leasehold property, another option would be to sell at auction. At auctions you'll often find private buyers who aren't as bothered about the length of a lease, so will consider properties with short leases.

In these instances, auction buyers may factor in the cost of the lease extensions with their bidding price, and may also factor in any potential risks that come with dealing with the freehold owner and negotiating a longer lease.

Summary: Long live a long lease!

The best thing to do with a property or flat with a short lease is to get a lease extension as soon as possible. The sooner you extend the lease, the cheaper the whole process will be. Not only is it a cheaper option for you as a short lease property owner, it also makes your property much more attractive to a buyer. Mortgage lenders are much more willing to accept applications, you can avoid higher ground rents and the value of your property will increase.

Valuing your property with an estate agent or conveyancer is a really important first step in the process, especially if you're looking to sell. For an online valuation you can use our quick and easy-to-use Online Valuation Tool. Or you can use our trusted Estate Agent Comparison Tool to find the best agent to meet your needs.