A leasehold purchase means that what you are buying is essentially just the ‘lease’, and not actually the property.
One of the most important deal breakers for any flat purchase is what the length of the lease is. Buying a leasehold property with a lease that’s too short could knowingly cost you thousands of pounds to rectify.
It’s an incredibly important aspect of buying a leasehold property, in this article we look at how long a lease should be when buying a flat, how to find out, and the cost implications if a lease does need to be extended.
What Is A Lease On A Leasehold Flat?
When you purchase a leasehold flat, you don’t own the property, and you don’t own the land that surrounds it, you own a lease.
The lease is an agreement between yourself and the freeholder which outlines your responsibility as a leaseholder, what you can and can’t do with the property, and information relating to ground rent and service charges.
The lease is your bible, and you’ll find yourself referring back to it multiple times when checking what your rights are as a leaseholder.
If you are in the initial purchasing stages of purchasing a leasehold property the estate agent should be able to provide this early initial information to you. But, they can often get this wrong.
It is very rare to be privy to seeing the lease at this stage until you are in the midst of legal paperwork.
During the legal process your conveyancers should receive a copy of the current lease which will outline this information. It is not from when the the lease starts with you, it is how many years are remaining on the lease from when it was initially setup.
If you are already the owner of the leasehold property and you cannot find a copy of your lease then you can download your title register and office copy of entry of the leasehold title from the Land Registry. You need to initially pay £3 to download a copy of the title register, it is then only a further £7 for the deeds request.
How Long Should A Lease Be When Buying A Flat?
Flats listed for sale with a short lease are listed at a below market value price because it carries a lease defect. This does interest cash buyers, but a mortgage lender will typically not lend on a short lease.
There are occasions where someone may be selling a leasehold flat with a short lease and they start the lease extension process for the purchaser. This is quite common as you need to have owned the property for 2 years before you can start a lease extension. Some sellers and purchasers also come to an agreement where the cost is split between two parties.
If you want to purchase a leasehold flat and only envision living in it for a couple years then you’d be better off looking for a lease that is 90 years or more, as a shorter lease does cause saleability issues.
Ideally, a lease should be much longer. The length of leases do vary, and 999 year leases are few and far between nowadays. Standard lease extensions these days add 90 years onto the remaining terms of leases.
Just remember, never touch anything that comes close to that 80 year mark, it will save you a lot of stress and money if you just walk away from it, even if it is your dream flat.
Costs of Extending A Lease
Extending a lease can vary vastly in costs due to the freeholder you are dealing with, and legal fees. However, it is something that will usually run into the region of thousands of pounds.
Extending a lease adds 90 years onto the existing term of your lease, as well as reducing your ground rent to a peppercorn. A statutory lease extension is roughly 19 x current ground rent levels, plus legal / surveyor fees. You’ll often also have to contribute to the legal fees of the freeholder.
You can get a rough ballpark figure on what it might be by using a lease extension calculator.
It is much cheaper to extend a lease before hitting the 80 year mark, this is because it attracts something called marriage value. The shorter term left on the lease past the 80 year mark, the more expensive it becomes.
You should never wait until a leasehold ends because the property reverts to the freeholder.
Why You Need To Avoid Marriage Value
“Marriage Value” kicks in when the lease falls below 80 years.
A property with a short lease is valued less than one with a long lease, because the property reverts to the freeholder when a lease runs out.
When the lease is extended where there is a lease below 80 years (or the freehold is bought by the leaseholder in the case of a house), the value of the property increases and this increase in value is shared between the freeholder and leaseholder (marriage value) under current law.
The Problems With Marriage Value As A Leaseholder
The problem I have with it is –
- The leaseholder (one or more of them) has maintained and added all the value to the property, the freeholder has often done nothing except collected an income via ground rents and other fees such as deed of variation, requests for consent etc.
- The leaseholder usually has a much larger financial interest in the property compared to the freeholder, say 95% versus 5% of the property value. The freeholder therefore gets an unjustified windfall via marriage value.
- It is an invented concept in terms of leasehold where one party has added all the value (the leaseholder by maintaining the property), the freeholder has added no value.
- Property values usually increase over time. An inactive freeholder who just collects fees during the term of the lease has gained an unjustified windfall, although this is less contentious because inactive shareholders get dividends and gain in the value of their shareholdings (which may be subject to capital gains tax). The value of shares can fall so a shareholder is probably taking a greater risk compared to a freeholder.
- The marriage value concept holds a gun to the leaseholder’s head. The more they delay below 80 years, the greater the cost to extend or buy the freehold. Some leases have very high ground rent which can be removed by doing a lease extension, so the leaseholder is held to ransom, trapped between expensive choices in order to maintain the value of their investment.
If you are in the throws of flat hunting, be very mindful of the lease and asking the right questions. I would always advise looking for a flat with an ample lease term of 90 years + where possible. Anything nearing the 80 year mark is trouble, and money waiting to happen.
There are leases out there with a larger remaining term, if there’s stuff just not stacking up with a leasehold property it’s best to walk away now before you ending up with very empty pockets.
Always consult a legal professional for their direction, and do feel free to leave a comment or drop me an email as a previous leaseholder who has experienced this all first hand.