Selling a Property with a Short Lease

When viewing that beautifully refurbished flat overlooking the common “how long is the lease?’ may not be the first question that comes to mind but it will be one of the most important.

The length of a lease is critical to the value of a property; especially if it is already below the 80 year mark but also if it is approaching that milestone. In establishing the cost of extending a lease The Leasehold Reform, Housing and Urban Development Act 1993 (the Act) provides us with the formula as well as setting out the procedures to be followed.

To qualify in the first instance you must have owned a long lease for the past two years. A long lease is defined as follows:

  • A lease of a term of years absolute in excess of 21 years when originally granted
  • A shorter lease which contains a clause providing a right of perpetual renewal
  • A lease terminable on death or marriage or an unknown date
  • A leaseholder having held over at the expiry of a long lease, and the landlord has not served a notice terminating the tenancy
  • A shared ownership lease where the leaseholders’ share is 100%

It is often only the two year ownership that will determine whether or not you can extend so a prospective purchaser will either have to wait or have the current owner initiate the process and assign the right to the lease; allowing them to continue after the sale. Technically the leaseholder acquires a new lease as opposed to actually extending it.

The new lease will be for:

  • A term expiring 90 years after the termination date of the original lease.
  • At a ‘peppercorn’ (i.e. no rent).
  • The remaining lease provisions will generally be the same as the original lease.

The compensation payable to the Freeholder is comprised of three parts:

Diminution in value of Freeholder’s interest (Ground Rent)

This complicated definition refers to the fact that the Freeholder at the present time has the right to receive x amount of ground rent for the remainder of the current lease. Upon the granting of a new lease the leaseholder will no longer pay any ground rent and the Freeholder is therefore compensated for this loss.

Reversion to Freeholder with vacant possession

This is based on the fact that the current lease will eventually expire and the leasehold interest will return to the Freeholder. Essentially the calculation here is ‘what is the value today of the right to receive a property worth x amount upon the expiration of the current lease?’

Marriage Value

This final, and often largest, of the constituent parts is the increase in the value of the property following the granting of a new lease. The Act states that when the current lease is under 80 years the sum should be shared equally between the Freeholder and leaseholder. A typical example would be a flat worth £300,000 with a long lease that is only worth £280,000 with its current short lease; the Freeholder would be entitled to half the difference i.e. £10,000.

Ultimately the implications of a short lease will have a significant effect on the marketability of a property so both buyers and sellers need to be aware. If the process is as transparent as possible from the start there’s no reason why a short lease should hinder any sale.

The best course of action for an owner selling a flat with a short lease is to establish a realistic figure to extend (with an allowance for professional fees) and market the property at a price which allows the purchaser obtain a new lease following the purchase.

Written by Justin Burns BSc MRICS of Peter Barry Surveyors