My partner and I are considering buying a flat with 51 years left on the lease.
The estate agent marketing the property claims it will likely cost around £250,000 to extend the lease by a further 99 years. The ground rent is £50 a year.
How do we go about cross checking this before we purchase? If a leasehold extension specialist is required, how do we find a suitable one and how much should they cost?
Could the price we pay for the flat impact how much we pay for a lease extension?
Also, we understand we can’t use a mortgage to fund it, but were wondering if there are any mortgage options for anyone buying a short lease and if so what sort of lenders and what sort of rates would be likely?
Too risky? Our reader is considering buying a flat with 51 years left on the lease and is unsure how to proceed
Ed Magnus of This is Money replies: Buying a flat with a short lease certainly comes with a degree of risk, but it could end up being a good investment.
Your first point of call should be to get a proper valuation done by a specialist. You can find lease extension experts via the Association of Leasehold Enfranchisement Practitioners (ALEP).
But there may also be some merit in buying the flat and waiting a few years before trying to actually extend the lease.
This is because of the Leasehold and Freehold Reform Act 2024, which could make it cheaper and easier for people to extend leases in the future.
The Act is meant to include the removal of something called ‘marriage value’. Marriage value is the increase in value of a leasehold property as a result of a lease extension.
Put another way, it’s the financial benefit that results from merging part of the freeholder and leaseholder interests, hence the term ‘marriage’.
Under current law, where the unexpired term of the lease exceeds 80 years, no marriage value is payable.
However, when a lease drops below 80 years the marriage value must be split 50:50 with the freeholder.
It’s worth pointing out that the new Leasehold Act has already faced a challenge from six major freeholders earlier this year in the High Court, the outcome of which is yet to be announced.
If successfully challenged, it could result in the government having to revisit the legislation, most likely to the detriment of leaseholders.
For expert advice we spoke to Henrietta Hammond, a partner at Beckett and Kay and member for the Association of Leasehold Enfranchisement Practitioners (ALEP), Angela Kerr, director at property advice website HomeOwners Alliance, Donovan Mawson, a director at mortgage broker MSP Financial Solutions, Linz Darlington, managing director and Founder of lease extension service, Homehold.
What expert advice do they need?
Henrietta Hammond replies: It is very important to take specialist advice before your purchase, both from the legal side and also valuation.
It’s a very substantial investment and so the importance of good advice should not be underestimated.
The law around lease extension is complex and is also going through changes, so your chosen advisors need to be abreast of both the current law and the possible developments so they can advise you accordingly.
Your conveyancing solicitor for the purchase may be able to recommend someone, or you can use the portal on the Association of Leasehold Enfranchisement Practitioners (ALEP) website to find someone local and appropriately experienced.
You can seek several quotes to ensure you are paying a sensible fee – they are likely to base their fee on how complex they feel the valuation and negotiation may be, which will depend on the value of the property, any quirks of the lease or the flat in question, and their experience of the particular landlord.
Henrietta Hammond , a partner at Beckett and Kay and member for the Association of Leasehold Enfranchisement Practitioners (ALEP)
Angela Kerr adds: A 51 year lease is very short and you’re right the estate agent’s ballpark figure of £250,000 for an extension needs to be verified.
The only way to do this properly is to instruct a specialist lease extension valuer who will calculate the likely premium using market evidence and case law.
You’ll also need a solicitor who specialises in lease extensions to manage the process.
Fees for professional input will usually run into the thousands, on top of the premium itself.
How soon can they extend the lease?
Linz Darlington replies: The good news is that you almost certainly will have a legal right to extend the lease of your new flat by 90 years.
Recently the law has changed so this right can be exercised as soon as your ownership of the flat is registered at the Land Registry.
Could the price they pay for the flat impact how much they pay for a lease extension?
Linz Darlington replies: Yes, it could. For example, the freeholder can argue that having purchased the flat at a big discount, the buyers are making a significant ‘profit’ by extending the lease now and this should be shared with them.
There is current case law which suggests that if the buyers were to wait three years after purchasing the property, then the sale transaction would be too historic to provide a useful data point.
After this time has elapsed, there is an argument the freeholder could no longer rely on the discounted sale price to increase the marriage value – but it doesn’t mean they won’t try it.
Angela Kerr , director at property advice website HomeOwners Alliance
What if the seller extends the lease prior to completion?
Linz Darlington replies: If the seller sorts the lease extension before completion, then this is a very different story because the flat won’t have sold with a short lease.
However, if the seller goes to the expense and hassle of extending the lease, then they will want to sell the flat for full market value.
What costs are involved in a lease extension?
Linz Darlington replies: The lease extension cost will be negotiated with your new freeholder. However, the framework for doing this is set out by the Leasehold Reform Housing and Urban Development Act 1993 and you can take your freeholder to tribunal if they don’t play ball.
You’re right not to trust the estate agents guesstimate of how much this should cost and you should pay for advice from a specialist leasehold valuer.
The lease extension price is likely to be significant. Once a lease has dropped below 80 years, part of the price includes an additional component based on the hypothetical profit you will make when you extend the lease. This component is known as ‘marriage value’.
How much you pay for the flat could have an impact on the hypothetical profit / marriage value calculation, so you need to ask your instructed valuer to take this into account and advise you accordingly.
You also need to budget for your own legal and valuation fees, and those of the freeholder – which you must pay. These will likely be similar to your own, but could be more.
Linz Darlington , managing director and Founder of lease extension service, Homehold
What other advice would you give?
Linz Darlington replies: Extending a lease on a property can be expensive, time consuming, stressful and unfair.
Before embarking on this purchase, you should consider whether you could buy a flat with an extended lease, and save yourself the hassle.
Angela Kerr adds: I’d also be asking why the lease hasn’t already been extended. For example, is it because of an absent freeholder? If that’s the case the lease extension will be even slower and more complex.
For most buyers, the practical options are either the seller extending before sale or negotiating a steep discount so you can take on the extension yourself.
Should they wait for further leasehold reform before extending the lease?
Henrietta Hammond replies: You should have a conversation with the valuer about the proposed reforms.
The Leasehold and Freehold Reform Act 2024 is on the statute books, but large parts of it are not yet effective.
The valuation methodology for calculating the premium will change when the relevant part is ‘switched on’ by secondary legislation.
A large part of the premium will be made up of something called Marriage Value, but this will not be payable if and when the Act is enacted in full.
There may therefore be some savings if you are able to wait to do the lease extension.
However, there is still significant uncertainty about timing, and there are other elements of the calculation which could increase the premium if you wait.
Professional advice is crucial so you can make a well-informed decision about whether or not to go ahead.
Linz Darlington adds: Yes, waiting for further leasehold reform is an investment strategy – the ‘pro’ is that you buy a flat now with a short lease for a significant discount.
You then hold onto it until the law changes and extend the lease when it is cheaper to do so.
This strategy is not without risk: the ‘con’ is we don’t know when the law will change, and we don’t know how much cheaper a lease extension will be.
Reform on the cards: There is the potential for lease extensions to become cheaper in the future, albeit there is no guarantee
Can they get a mortgage?
Donovan Mawson replies: Like with most things, lending criteria when it comes to lease length varies quite significantly from lender to lender.
To stay on the safe side and keep all your lending options open, you typically want the lease length to be over 85 years at the start of the application but there are a few competitive lenders that can consider leases below 50 years on application.
Most of these insist that the lease be over 30 years at the end of the mortgage term, and will rely on commentary from their valuers on saleability and demand for a property with such a short lease.
It is worth noting that a shorter term (21 years in this scenario) may have an impact on affordability.
Using interest-only mortgages can sometimes be a clever workaround with cases like these, but interest-only is only advisable in certain scenarios so it’s always worth speaking to an advisor.
Donovan Mawson , a director at mortgage broker MSP Financial Solutions
What rates could they get?
Donovan Mawson replies: In terms of rates, right now you would be looking at something between 4 per cent and 4.5 per cent depending on loan-to-value, so not a million miles off the best lenders out there.
It’s all about knowing where to look and whether the property is ‘desirable’ with a short lease.
If the lease is being extended simultaneously on completion of the mortgage, we can typically let a lender know this and they will instruct their surveyor to value the property both in current condition and with the lease extended.
So in short – if they have cash to buy then great and we can apply for a mortgage with mainstream lenders when either the lease has been extended, or is close to being extended – with funds released once the extension is confirmed.
But if a cash purchase is not an option, then a mortgage wouldn’t necessarily be off the cards.
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