Buying a property with a short lease

An insight into residential lease extensions from Holmes & Hills lease extension solicitor Callie Tuplin.

There are many potential pitfalls to consider when buying a property with a short lease: Will you be able to get a mortgage? Will the short lease reduce the number of lenders who will agree to lend on the property? What if I want to re-mortgage the property 2 years after purchasing, at which time the lease will have dropped below the agreed length to lend on and I will have only just qualified to start the statutory process now? If I can start the statutory process after two years, how am I going to fund it if I cannot re-mortgage the property until the lease extension has been completed?

The questions go on and a lot of them are not even taken in to consideration when a potential buyer has found their first new home or their forever home which they have fallen in love with, but has a short lease. There are however steps that can be taken to reduce the associated costs involved in buying a property with a short lease.

There are two ways in order to either achieve a lease extension with the purchase simultaneously or to be able to proceed down the statutory route without having to wait the mandatory two years.

1. Voluntary Non-Statutory Lease Extension – simultaneous with the purchase. If you try to obtain a mortgage for the purchase of a new property but cannot due to the short length in lease term remaining or you as the buyer require the lease to be extended prior to or on completion of the sale, there is a way around this. The seller could approach their landlord to see if they would agree to a voluntary lease extension to be completed simultaneously with the purchase. Thus, the new lease will be granted to the seller and immediately be transferred to you as the buyer on the day of completion (i.e. the lease extension and purchase complete on the same date).

However, if you proceed down this route, it is imperative that you understand the terms being offered, in particular any ground rent provisions they may offer as it will be you that will automatically be bound by them following completion. In addition, the sale proceeds can be utilised to pay the premium to the landlord without having to find the funds separately. This is quite a common route to take in cases where the lease length is short and has to be extended prior to or on completion.

However, you should be aware of the pitfalls when extending a lease on a non-statutory basis that the Landlord does not take advantage of the situation and charge a high premium with high ground rent provisions for a short additional term, simply because they know you need their help

2. Statutory Lease Extension - The second method of extending a short lease is under the Leasehold Reform, Housing and Urban Development Act 1993. Leaseholders who have owned their flat for two years have the right to serve a notice on their landlord (known as a Section 42 Notice) to extend their lease.

Under this procedure, they would be entitled to an additional 90 years on top of the remaining lease term and upon completion of the lease, the ground rent is reduced to a peppercorn. As the Landlord will not receive ground rent following completion of the lease extension, the premium payable to the Landlord generally should compensate the Landlord for the loss of ground rent. The whole process is stipulated by timeframes and it is essential that they are all adhered to as extensions to being able to make applications to the FTT or Court cannot be extended.

There are certain requirements under the legislation that you have to comply with, one being that you have been registered as the owner of the property for in excess of 2 years. Whilst on completion of a purchase you as buyer will not satisfy this criteria, if the seller does, they can commence the claim between exchange and completion and on completion the benefit of the claim can then be assigned to you as the buyer. If the benefit is assigned to you, you would effectively step into the position the seller was in, having commenced the claim and then you take over from them and continue the claim as if you had commenced it yourself. However, you would then be responsible for the payment of all costs and premium. Please note though, you would only be able to proceed on this basis if the seller meets the statutory requirements and, if you are obtaining a mortgage for the purchase, they agree to lend on the basis of the current unexpired term and not an extended lease term.

Please note if your lease is not extended or a claim is not commenced prior to completion of your purchase, if you cannot come to a voluntary agreement with your Landlord you will have to wait 2 years to qualify for a statutory lease extension.

For free initial advice on buying a property with a short lease or any other lease extension matters, contact lease extension solicitor Callie Tuplin on 01206593990 or email cnt@holmes-hills.co.uk.