Most property in the UK is sold and owned on a freehold basis. This means that you own the property outright with no other party being ultimately responsible it. Some properties are sold on a leasehold basis. If this is the case, you may have come across the term ‘short-term lease’. So, what is a short lease property? Moreover, should you buy or avoid?
What is a leasehold property?
Leasehold properties are especially common in cities or those which reside within a larger building. This means that when purchasing the property, you’re buying ownership for a certain period of time. The Freeholder retains ownership of the land which the property is built upon.
What does this mean for home buyers?
Normally this means that you’re able to purchase and occupy the property in a similar way to a freehold property – assuming there is a decent length of time left on the lease (they are usually issued for a period of 999 years). You’ll probably need to pay the freeholder a ground rent, as well as a ‘service charge’ of sorts. These cover your proportion of the cost of maintaining and insuring the building.
If you’re getting a mortgage, your lender will probably only be happy to lend on something that has over 70 years remaining on the lease.
Why buy a short lease property?
If you’re able to raise the money, buying a property on a short lease can be a cost effective way to get a foot on the property ladder. Having said this, most people are wary of getting involved.
There’s legislation in place that allows leaseholder to extend their lease after two years of ownership of a property. This means you can effectively pay for the property in two parts – one lump at the point of purchase and a further lump when you extend the lease.
Typically, a lease extension would result in your lease being topped up by 90 years. Though be sure to ask your solicitor to advise you about this as some large estates will only grant shorter extension periods. This may also cause issues getting a mortgage.
Applying for a lease extension
The outgoing seller could apply for the lease extension on your behalf (make sure that the cost of the new lease is included in the purchase price). Alternatively, you can wait and apply for an extension once you’ve lived in the property for 2 years. You need to investigate the cost of the lease extension and whether or not you’ll have the cash to pay for it.
If you have more than 80 years left on a lease, the cost of extension should just cover the administration for the legal work involved. As lease lengths get shorter, the cost of renewal rises to take into account the ‘marriage’ value that’s being added to the property with a longer lease.
Make sure you establish early on that the seller has the power to assign the lease to you. It’s also important to confirm that there’s more than 5 years remaining on the lease. This will avoid having to revert to the freeholder for their consent to extend the lease.
A complex option but one worth considering
Buying a property on a short lease can be a complex business and, while I think they’re certainly worth considering, it’s not for the faint-hearted. I would definitely advise you to seek independent, expert advice before making any commitment to buy.
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