In this article:
- What is a short lease and what are the implications for property value
- Challenges associated with selling properties with short leases
- Strategies to enhance the marketability of a property with a short lease
- Recent legislative changes affecting lease extensions
As a property owner, navigating the intricacies of lease terms is crucial, especially when dealing with short leases. A clear understanding of what constitutes a short lease, its impact on property value, and the challenges it presents can allow you to decide whether the risks of a short term lease are right for you.
What is a Short Lease?
In the UK, a leasehold property grants ownership of the bricks and mortar, but not the land, for a specified period, after which ownership reverts to the freeholder. Traditionally, leases are granted for long durations, often 99 to 999 years. A lease is generally considered “short” when it falls below 80 years. This threshold is significant because once a lease dips below 80 years, the cost to extend it increases substantially due to “marriage value”, the potential increase in property value following a lease extension.
Challenges of Selling a Property with a Short Lease
Selling a property with a short lease can present several hurdles:
Mortgage Difficulties: Many lenders are hesitant to finance properties with short leases. Leases under 80 years can make securing a mortgage challenging, and some lenders may require leases to have at least 85 years remaining. This reluctance stems from concerns over the property’s diminishing value as the lease term decreases.
Decreased Property Value: Properties with shorter leases often see a decline in market value. Potential buyers may be deterred by the impending need for a lease extension and the associated costs, leading to lower offers or prolonged time on the market.
Limited Buyer Pool: The combination of mortgage challenges and decreased value narrows the pool of prospective buyers. Cash buyers might show interest, but they often seek significant discounts to offset the risks involved.
Strategies to Enhance Marketability
If you’re looking to sell a property with a short lease, consider the following approaches:
Lease Extension: Extending the lease can significantly increase your property’s attractiveness. Under the Leasehold Reform Housing and Urban Development Act 1993, qualifying leaseholders have the right to extend their lease by 90 years. It’s advisable to initiate this process before the lease drops below 80 years to avoid additional costs associated with marriage value.
Transparent Pricing: Set a realistic asking price that reflects the lease length. Being upfront about the lease term and pricing the property accordingly can attract serious buyers who are aware of the implications.
Highlight Positive Aspects: Emphasise the property’s strengths, such as location, condition, and potential for appreciation post-lease extension. Providing detailed information can tempt buyers in and may convince them to see the property’s value beyond the lease term.
Recent Legislative Changes
Recent reforms have aimed to make the lease extension process more straightforward and cost-effective. The abolition of the two-year ownership rule now allows homeowners to extend or purchase their lease from the first day of ownership, eliminating the previously mandatory waiting period. This change addresses short lease issues promptly, enhancing the property’s future marketability.
It is strongly advisable to keep an eye on the latest developments with the Leasehold and Freehold Reform Act 2024. While this currently stuck in red tape and administration, these changes will have a big impact on leasehold properties in the future.
Conclusion
Navigating the challenges of a short lease requires proactive steps and informed decision-making. By understanding the implications of a short lease and utilising available strategies and legislative provisions, property owners can effectively manage and mitigate potential drawbacks, ensuring their property’s value and appeal in the market.
If you would like to discuss the pros and cons of a short leasehold on your property, feel free to get in touch with us for some no obligation advice.
