What to consider if you want to buy a property that has a short lease

What does buying a property with a short lease mean?

These days, properties on the market in the North East with a short-term lease arrangement aren’t seen very often. That means that many buyers don’t understand what buying a property with a short lease means or even how it will affect them.

Apartments are the most common type of property that can be impacted by short leases. If you’re considering purchasing an apartment that has a short-term lease arrangement, the expert team at Giraffe Residential have some good advice for you.

Short-Term Leases – what are they?

When a buyer purchases a property outright, this is known as “Freehold”. The buyer obtains complete control and ownership of the property until they decide to sell it. Leasehold properties, however, mean you are only the property’s owner for the duration of its lease. Once that period has expired, the property’s ownership returns to the freeholder or landlord.

Typically, the initial term of a leasehold property is at least 99 years, and some developers are now selling new-build properties with leases as long as 999 years. Usually, a short lease will be any lease that has 80 or fewer years remaining on its term.

How does remaining lease affect a property’s value?

A leasehold apartment’s value decreases as its lease decreases in length. A leasehold apartment that has over 99 years of its lease remaining is usually worth around the same as an identical freehold apartment would be worth. An apartment that only has 70 years left on its term will have a value that is about 85% or 90% of its full value, and one that has just 50 years left has a value nearer to 70%.

Can I extend a lease?

In the 1990s, the law regarding leasehold properties was reformed, giving owners of leasehold properties a right under the law to extend their lease. After having resided in the property for at least two years, you now have the statutory right to extend the lease by another 90 years.

Nevertheless, if your property only has a short remaining lease term left, waiting two years before applying for it to be extended isn’t always ideal. Some buyers, therefore, ask the existing owner to serve the statutory notice to extend the lease as one of the conditions of their purchase, but this can only be done if the existing owners have resided there for at least two years themselves.

Do I have to pay for a lease extension?

You do have to pay for a lease extension, but the amount varies depending on several factors. These include:

• The amount that the freeholder’s property market value interest will be reduced by extending the lease
• Losses incurred by the freeholder due to extending the lease
• The property’s “Marriage Value”. If a property that has a maximum of 80 years left on its lease is then extended, the freeholder has a legal entitlement to half of the increase in value. Therefore, it’s usually the advised for leaseholders that they start the process of extending the lease while there are more than 80 years remaining.

Ground rent

Leaseholders have to pay ground rent to their landlord every year. While this may be just £10, it could be a far larger amount. Before you agree to buy a leasehold flat, you need to check the amount of ground rent and whether it’ll be changed at any future time.

Why buy a short-lease apartment?

Although short-lease apartments aren’t the best option for everyone, they can appeal to people without dependents or retired people. Short-lease apartments are sometimes an effective way of buying a property that is affordable with no concerns about it maintaining value.

Buy-to-let investors also often find short-term lease apartments attractive. They can often make their investment back several times over if they rent out the property for the period that remains of its lease. Once the term expires, the freeholder can then regain its ownership.

What risks are associated with purchasing a short-lease apartment?

Short-lease properties are often hard to sell. As the lease becomes shorter, the less the property is worth, and that is not usually appealing to either lenders or buyers. It’s also possible that the existing property owner cannot afford to pay the cost of extending the lease and that may mean the property also has significant repairs that need to be carried out.

If you’re ready to buy a property in the North East, contact our team at Giraffe Residential on 0191 276 0550 or search all of our available properties on https://www.girafferesidential.com/sales/