Solicitors generally advise clients against buying any flat when the lease has less than 70 years left to run, the reason being that it is difficult to get a mortgage on a property with a 'short' lease.
But sometimes a property comes on the market which seems to flout all the rules.
Normally an unmodernised one-bed basement flat with less than thirty years left on the lease wouldn't look much of a buy – especially when the selling agents themselves describe it as uninhabitable and affected by vibrations from the nearby train-line!
But this apparently undesirable residence has recently been on the market for £595,000 – and it's already been snapped up.
The reason for this is undoubtedly 'location, location, location' – it is situated in Stanhope Gardens, South Kensington, one of the most desirable (and expensive) parts of London.
The agents say they have already accepted an offer “over the asking price” and point out that a smaller one-bed flat in pristine condition on the second-floor of the same block is on the market for £1,295,000.
Why you need to be a cash buyer when a flat has a short lease
It is more than likely that the buyer of this run-down flat will be paying cash as it is not easy to get an ordinary mortgage on a property with a lease of less than 70 years left to run. There may be a few lenders who will consider such properties in some circumstances but these will not be ordinary high-street lenders and their interest rates will be much higher than normal.
Some buyers may be tempted to snap up a flat at an apparent bargain price because it has a short lease, with the idea of getting the lease extended.
But even without a lease extension it may still be worthwhile buying a property cheaply if you have got the cash. While the capital value may decline as the lease gets shorter a lease which has forty, thirty or even twenty years left to run has still got plenty of value.
Buy-to-let investors may calculate that if they can snap up a cheap bargain they can recover their investment several times over from rents during the remaining life of the lease.
Such bargains may also be attractive to say a single person or retired couple looking for a cheap home who won't be worried about having a valuable asset to leave to anyone else (or to the tax-man!) when they die.
And if the lease does expire while you are still living in the property you are entitled to remain in occupation although you will have to pay rent.
Getting a lease extension will add value - but how much does it cost?
Some buyers will plan to try and get the lease extended to increase the value of the property. However it should be remembered that the shorter the time a lease has left to run the higher the premium which must be paid to the freeholder.
This is because the value of the freehold reversion increases as the leasehold term decreases.
Flat-owners generally have a statutory right to a ninety-year lease extension but will have to pay a premium if they want to exercise this right. But before being able to apply an owner must have owned the property for at least two years.
Buyers can get round this rule by asking their seller to serve a statutory notice, which can then be assigned to the buyer when the sale is completed.
Why you should consider a lease extension even with an 80+ year lease
If you want to sell a flat which has a 'short' lease (which these days means anything less than 80 years) it is well worth considering getting a lease extension before you sell. Once the term of the lease falls below 80 years something known as 'marriage value' has to be factored in to the calculations, which increases the amount payable to the freeholder.
Buyers can be deterred by the prospect of having to get a lease extended after they have bought. They will not know how much they will have to pay or how long it will take.
You may be tempted to approach your freeholder to ask if they would be willing to extend the lease on a voluntary basis, without going through the statutory procedure. This is not always a good idea, as freeholders will often offer terms which are less generous than those which they would be obliged to give under the statutory scheme.
A statutory lease extension will be for a further 90 years on top of the existing term, at a peppercorn ground rent (i.e. any existing ground rent is reduced to nil.)
But if approached for an extension on a voluntary basis freeholders may only offer a shorter extension and also want to increase the ground rent. They may also want to insert other onerous clauses in the existing lease.
So it is better to contact a solicitor who can check that you are entitled to claim an extension and can make sure the proper procedures are followed. You will also need a surveyor's advice on the likely premium which the freeholder could demand.
The method of calculating premiums for leases extensions is set out in the Leasehold Reform Housing and Urban Development Act 1993, as interpreted by the courts.
Calculators are available on many web-sites which will provide a reasonable idea of the amount payable. However it is essential to obtain an individual valuation from a professional surveyor who is thoroughly conversant with the 1993 Act and the decisions of the courts to obtain a more accurate idea of the amount which should be paid.
Be aware that you will also have to pay the freeholder's solicitor's and surveyor's fees as well as your own.
Although it can take some time to get a lease extended the cost is likely to be outweighed by the value it adds to your property, as well as making it easier to sell.