Why short leases are harder to sell

Why is it harder to sell a flat which only has a short lease? Buyers are generally put off for the following reasons: 

  • Most mortgage lenders now require a minimum term of 70 years unexpired 
  • The shorter the lease the more a lease extension costs 
  • When the unexpired term is less than 80 years, ‘marriage value’ has to be included in the cost of a lease extension 
  • Buyers don’t want the hassle and uncertainties of negotiating a lease extension themselves 

Minimum term required by mortgage lenders – individual lenders’ requirements vary considerably, but as many of the major lenders require a minimum of 70 years unexpired when the mortgage is completed, anything shorter is generally regarded as unacceptable.  

Any difficulty in mortgaging a property will affect its value. Cash buyers may be prepared to accept a lease with a shorter term, but will expect this to be reflected in the price.

The cost of a lease extension rises considerably as the unexpired term gets shorter. As a lease gets shorter, the value of the freeholder’s interest increases. If a lease is extended by an extra 90 years under the statutory scheme, the value of this interest will be substantially reduced. The premium payable for a lease extension will compensate the freeholder for this reduction in value, as well as for the loss of ground rent.  

‘Marriage value’ payable when the unexpired term is less than 80 years – the Leasehold Reform, Housing and Urban Development Act 1993 specifies that ‘marriage value’ is to be taken into account in determining the premium for a lease extension. This value is the potential for increase in the value of the flat arising from the grant of the new lease. The Act requires that this ‘profit’ shall be shared 50:50 between the parties – i.e. the leaseholder will have to pay 50% to the freeholder.  

But when the unexpired term exceeds eighty years, the marriage value is taken to be nil. Having to pay this marriage value can make a considerable difference to the premium. Furthermore there is considerable room for argument about the valuation, so buyers are generally happier with a lease which exceeds 80 years.

Buyers don’t want to negotiate a lease extension themselves – apart from any other considerations, buyers can’t serve a statutory Section 42 notice requesting an extension until they have owned the property for two years.  And negotiating an extension can be a lengthy, costly and uncertain process, especially if the freeholder wants to be difficult.  

Buyers much prefer sellers to get an extension sorted out beforehand. Sellers can agree to serve the S42 notice immediately before completion of a sale, and then assign the benefit of this to the buyer. But buyers will still be faced completing negotiations and paying the premium and cost for the extension, so they are going to want this reflected in the price they will pay.

Leases with a very short term left may still be saleable – cash buyers can be found to buy leases which only have a few years to run (Conveyancing Solicitors call this the ‘fag-end’ of a lease) especially when a flat is in a fashionable area – it can be cheaper overall than renting in the long run. But this is a specialised market, and will not apply to the majority of flats.

Another factor which may affect the current market is that many foreign buyers are apparently reluctant to buy leasehold properties, so they are unlikely to buy a property unless their Conveyancing Solicitor is able to advised them that the lease term is considered long enough to be easily saleable.


by admin
Monday 14th of September 2015 09:34:29 PM