It is often left until the decision to sell that the full implications of a short lease value are properly understood. In general terms, the longer the lease, the better; and those with over 100 years remaining are not normally a problem from a valuation perspective. Legislation states that where the lease has less than 80 years remaining, the payment to the landlord will have to include 50% of the marriage value (explained in more detail below) when the tenant acquires a lease extension. The second problem when selling a short lease is that the majority of mainstream mortgage providers, as a rule, refuse to lend to a purchaser on lease terms of less than 55 years, so anything shorter will only be available to buyers who are paying 100% cash.
What should you do from the outset?
Check the length of your lease.
The statutory process
The Leasehold Reform, Housing and Urban Development Act 1993 (as amended) (“the 1993 Act”) enables tenants to extend their lease by 90 years in addition to the unexpired term at a peppercorn ground rent, in return for a premium.
As the length of the unexpired term of a lease gets shorter, the premium payable to extend increases. If a lease has less than 80 years unexpired, then marriage value is payable to the landlord which could be significant. A tenant may also encounter difficulties if they want to sell their flat and the unexpired term is considered unmortgageable.
How do I qualify?
In order to qualify for a statutory lease extension, the flat must be held under a long lease (i.e. originally granted for a term of more than 21 years) and the flat must have been owned for more than 2 years. The right to acquire a statutory lease extension is only open to those tenants that have a residential lease.
What is marriage value?
Marriage value is payable when the existing lease has a term of less than 80 years remaining. The concept of marriage value is that the total value is worth more than the sum of the landlord and tenant interests in the same property. The 1993 Act requires that this “uplift” is shared equally between the landlord and tenant.
How is the premium calculated?
Compensation is payable to the landlord for the diminution of his interest. This comprises the loss of ground rent for the remainder of the term, plus the reversionary value of the property once the lease expires. Where the existing lease has less than 80 years unexpired the landlord is also entitled to 50% of the marriage value. And lastly, the landlord is entitled to any “other loss” that the landlord may incur as a result of the lease extension, but this is usually very rare.
How do I sell a flat with a short lease?
If a qualifying leaseholder is selling a flat, it is possible to serve a Notice (Section 42 Notice) and to then assign the benefit of the Notice to the buyer upon completion. This greatly assists the saleability of a property but it is essential that the buying party engages specialist enfranchisement advisors as any mistake can be fatal for the claim.
Service of a Notice upon the landlord, is usually undertaken after exchange to ensure the buyer is committed. At completion, the parties execute a Deed of Assignment of the Benefit of the Notice. This is not the same as a Deed of Assignment. The Deed enables the buyer to step into the seller’s shoes upon completion and continue with the lease extension process as if the buyer had owned the flat for 2 years.
I want to buy a flat with a short lease. Can I extend it at the same time?
There are many reasons to purchase short leasehold property, especially in prime Central London, not least because it offers an opportunity to invest in a secure, but sometimes volatile, market. By using the 1993 Act the purchaser can spread their capital payments across two transactions, which in itself can save Stamp Duty Land Tax as the tax is paid per transaction and not in aggregate. The market for short leasehold property is quite specialised and can sometimes bring less competition for the purchase of the lease, and marriage value is at its greatest when the lease is between 30 and 40 years unexpired, so the potential benefits are at their peak.
Ideally a prospective buyer is looking to buy a flat where the seller has owned the lease for more than 2 years. Note that they would need to wait for 2 years from the date of registration at the Land Registry should they decide to extend the lease after the purchase of the property.
Many tenants do not realise the length of their lease until they attempt to sell or remortgage their flat. Short leases affect the value and saleability of a flat and importantly it could cause issues with mortgage lenders. Many lenders stipulate as part of their conditions of lending that there must be a minimum term left on the lease. The length of lease required can vary, but prospective purchasers will be less likely to accept a shorter lease and may find it difficult to secure lending. Remortgaging may also be prohibitive until the lease term is extended beyond the minimum term your lender requires. Remortgaging may well be possible without an extended lease but the consequence may be a higher rate of interest costing you more in the long term.