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Buying a Flat with a Short Lease? Should I take the plunge?
The Offer…
You’ve been offered flat for a great price – perhaps 20% or 30% or more below the price of other similar flats in the same area. There is catch; the flat lease term too short, perhaps there are only 55 years left on the lease and you need around 80 to 90 years minimum in order to raise a mortgage – and crucially, the same again when you decide to sell it.
Link to the UK Lenders Finance handbook here – you’d have to get a lease extension to satisfy one of these Lender’s criteria
OR copy and paste this
https://lendershandbook.ukfinance.org.uk/lenders-handbook/englandandwales/question-list/1846/
So how do you decide?
The risk is that once you’ve bought it, that you cannot get a lease extension on reasonable terms for a premium which has a safety margin within the discount being offered by the seller. Or, if you want to raise a mortgage to buy it, the lease extension has to happen before you buy it, the seller can’t afford to extend the lease and you get locked into a legal case which make take months or even years to resolve, and you end up paying a lot of legal fees to ‘sort it out’ and lose money again.
The reward would be that you can buy it and extend the lease for less the discount and take the difference as uplift – great if you pull it off. And much easier if you do not need to raise a mortgage to make it all happen. Either to buy it or to sell it again (more importantly!)
The elephants in the room!
- Service charge. Which includes but it not limited to cladding, fire safety, waking watch costs – link herewith (take a deep breath before reading), asbestos safety risk assessment, service charge consultation notices and prescribed forms,
- Freeholders, reversionary leaseholders, ground rents which may be subject to rent increases, management company fees (strictly speaking part of the service charge
- Leasehold Reform Acts and Commonhold and Leasehold Reform bills which are held up due to non compliance with the ECHR and the Human Rights Act 1998, in particular the methods of calculating freeholder compensation – which will remain uncertain. You can’t quantify how much it will costs, nor can you say when you will be able to calculate this.
- Changing Lender criteria as above
- Subletting issues if you intend to rent it out again- The Renters Rights Act is here and incoming.
- Ordinary title defects, lack of easements, onerous covenants, deeds of variation, insurance covenants and cover, unpaid service charge arrears, the Building Safety Act etc etc
- If its new build – all the new build documentation e.g. planning, building control, NHBC or other warranties, missing ground rent receipts on superior leases (if they get forfeited for non payment of rent, if you own a sublease you lease may also be cancelled
- and so on and so forth – i.e. many variables out of your control
As a legal question, you’d have to say it’s blackhole of uncertainty and woe. However, if you’re prepared to do your research and take on a lot of risk, there may be a great reward in it. Not for me however, not at this time! Just because, subjectively, you’re ok with this issues with this flat, will a mortgage lender or a reasonable buyer think the same way? If not, you have a big problem.
How do you go about it?
- Get legal advice before you even make an offer – do all the searches and get all the extra documents that should be there
- Get a full survey
- Get a calculation for the old method of how much to compensate the landlord – i.e. how much is it going to cost including marriage value, which the government intend to abolish
- Make a low offer with plenty of safety margin, find properties that have been on the market for a long time already or a seller who wants a quick sale
- Check the service charge like your life depends on it – you’re not just buying a flat, you’re buying a share of a business which runs the block of flats. If the business does not look good, and it’s badly run, walk away. If you’re not business minded, don’t do it, even it’s going to be your home. Your solicitor may understand it and say it’s ok (it may well be) – but the question is – do you understand it?
- Check all the stuff which is particularly onerous – building safety, fire safety, waking watch risks, insurance costs
- Work out how much safety margin you need and how long you intend to own the flat
- Make a risk assessment as though it’s Warren Buffet’s final investment and stick to the plan!
Good Look with it – you’ll succeed or fail by the quality of your own good judgement! This is guidance only – you need independent legal advice before you proceed.
Table of Contents
Top 50 legal questions – lots of useful leasehold content here