Homeowners – what you need to know if you have a short lease

Ken Stangoe | Jun 2017

Homeowners fall into two categories, Freehold Owners and Leasehold Owners. Freehold owners own their homes. Leasehold owners own a right to reside in a home for the duration of the leasehold. When the lease is “long” there is no real difference in the value of a lease and a freehold properly. However, once a lease becomes “short” its value starts to decrease rapidly.

What’s a short lease?

A short lease is a lease with less than 80 years left to run.

What are the consequences of having a short lease?

Firstly, once the balance of the lease falls below 80 years the value of your property decreases significantly.
Secondly mainstream lenders will generally not lend funds to purchase a short lease. This means that it may be difficult to sell your property.

Why haven’t I heard about this before?

Long leases have existed in England since the Doomsday Book. Therefore the issue of a long lease becoming “short” isn’t a new one. However, it is becoming more common. In the 1980s and 1990s there was a surge in the building of flats and the breaking up of large houses into individual flats. Many of these flats were then sold on 99 or 125 year leases. Those leases are now becoming “short” which is why this issue is now gaining lots of press coverage. In April 2017 The Homeowner’s Alliance published a report highlighting some of the issues that leaseholders will face in the near future and the importance of having a detailed understanding of your lease. You can view the report here http://hoa.org.uk/catalogues/report-on-uk-leaseholder-system/index.html.

What can I do?

You have two options:

  1. You can join together with all the flat owners in your building and buy the freehold of the building (known as collective enfranchisement);
  2. You can apply to the freeholder to extend your lease.

Whichever option you choose, you will be following a statutory process. This means that you have a legal right to either require the freeholder of the building to sell the freehold or extend your lease. There are very limited circumstances where the freeholder can refuse.

Why should I act now?

Property prices in London and the South East are reported to be rising at the rate of 12% per year. Take the example of a property outside Central London where the balance of the lease is currently 82 years and the value of the property is £500,000. The table below shows the estimated cost of extending the lease in the next 4 years. This assumes a rise in property prices of 12% per year and takes into account the decreasing balance of the lease. The cost of acting now is likely to be £7,000 to £12,000, by 2020 that cost will have risen to £23,000 to £26,000.

The same calculation for a property in Central London rises from £11,000 to £12,000 now to £36,000 in 2020. Therefore the sooner you can collectively enfranchise or extend your lease the lower the cost is likely to be. Where the balance of the lease drops below 80 years there is a significant increase in the cost of acquiring the freehold or extending the lease. Many lenders will be prepared to extend additional finance to allow a building to be collectively enfranchised or a lease extended.

How can we help?

We can explain the options which are available to you and guide you through the process to collectively enfranchise your building or extend your lease. We will prepare the required notices and ensure legal deadlines are met. We will assist with the negotiation of the terms of the new lease or transfer and ensure everything is finalised and registered at the Land Registry.

If you would like to speak to our expert call 01908 689307 or email kstangoe@geoffreyleaver.com

Ken Stangoe

Ken Stangoe | Partner

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