Purchasing a property with a short lease – what options does a buyer have?
Many buyers find their dream home, only to discover during the conveyancing process that the lease is problematically short. Usually, lenders require a minimum of 85 years left to run on the lease before they are willing to lend. Similarly, buyers are often worried if the term remaining on the lease is around 80 years, as the premium payable to acquire an extension increases drastically once the lease falls below this period. Is there anything a buyer can do in these situations?
If you are in the fortunate position to purchase the property without a mortgage you have two options.
Firstly, you can buy the property and try to negotiate a lease extension with your landlord after the sale completes. By going down this route, there are no rules and the landlord could refuse to extend your lease or set whatever terms they like.
Secondly, you can go down the route of a statutory lease extension. Subject to meeting certain criteria under the Leasehold Reform, Housing and Urban Development Act 1993, leasehold owners can pay a premium to extend their lease for 90 years (in addition to the existing unexpired term of the lease) at "peppercorn rent". One of the main drawbacks with this option is that you must have owned the property for two years before serving the statutory notice on your landlord to extend the lease. This increased period carries the downside that the premium payable will have increased by this point (as the lease term will now be two years shorter).
Buying with a mortgage
For those relying on a mortgage to purchase the property, the lender is unlikely to lend without certainty that the lease will be extended. To get around this problem (and depending on how short the lease is), the contract for sale could be drafted so that the current owner of the property (assuming they have owned the property for two years prior to the sale) submits the statutory notice to extend the lease on the landlord with the benefit of the notice being assigned to the buyer. The responsibility to pay the premium and costs relating to the notice are usually passed on to the buyer. This amendment to the contract for sale will usually appease the lender and result in a lower premium for the buyer to pay in relation to the lease extension. The downside to this method is that the process can be quite lengthy.
The Law Society recently published its Consultation Paper, "Leasehold home ownership: buying your freehold or extending your lease" in which it made proposals to simplify and reduce the legal and other costs associated with extending the lease.Among the reforms, the Law Society has proposed removing the existing requirement for ownership of the lease for the last two years in order to qualify for the right to a lease extension. Under the proposals, there would be no minimum ownership requirement.
This new proposal may make a huge difference to purchasers looking to buy a property with a short lease as mortgage companies might be amenable to buyer's solicitors submitting the statutory notice on completion as a condition of the loan. This removes the uncertainty around relying on the seller to submit applications on their behalf and the additional associated costs.For those purchasing a property without a mortgage, the benefit of this proposed legislation would be that owners would no longer have to wait two years to submit their application, thereby risking sudden and unforeseen increases in premium.
To discuss any issues relating to this article please contact Jessica Scarlett at [email protected]