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Buying a property with a short lease

There is a lot to think about when buying any property at auction and auction conveyancing, let alone one with a short lease. The main reason why prices at auctions might seem low is likely to be because there is a problem with the property, and one of the most common problems is because the lease is short.

Conveyancing Solicitors often advise clients against purchases when the lease has less than 70 years left to run because it is difficult to get a mortgage on a property with a short lease.   Of course, when you spot a bargain sometimes it is hard to resist. Not many people who go to an auction have taken solicitors advice before they go, so it is likely that they do not know what a short lease can mean for them now or in the future. The lease could have 69 years left, and you might think that this is not an issue.  However, when it comes to selling, the property will not be very attractive.  In fact it could be almost unsellable.

We’d suggest that if you are going to buy a leasehold property with a short lease, then before you start, make sure you have the money in place.  If you are a cash buyer, and you have the money available, then this won’t be an issue for you, but if you need finance, make sure the finance company knows the length of the lease in advance as many companies won’t lend on short leases.

We’d also suggest that you get an estimate of what it would cost to extend the lease.  It can be a lot more expensive than you realise!  The value of a leasehold flat diminishes as the lease gets shorter and closer to the term end, so it’s important that the purchase price reflects not just the length of the lease but also the cost of getting an extension.

Risks of buying a short lease at auction

1. If you buy a leasehold flat with a short lease you will have to wait two years before you can apply for a lease extension. The seller can apply for a lease extension, but if you are buying at auction, there won’t be enough time for the seller to start the process for you. 

2. When purchasing a flat with a short lease you will have to consider how much it is to obtain an extension, including the legal fees that will be involved.  This may make the transaction less attractive.

3. If you need finance, you will struggle to find a lender that will lend on a short lease, and any company that does will offer less attractive terms.

4. Unless you are able to get an extension, when you try and sell, the lease term will be even shorter, making your property even less attractive to potential purchasers. This would mean the property has considerable dropped in value, even in a rising market.

5. The lower the length of the lease, the costlier it is to extend. You might end up getting the property very cheap at auction but in 10 years’ time you might realise it was not such a good deal.

6. Property prices go down in value once a lease gets to less than 80 years.

7. You cannot extend your lease under statutory process if you have a lease that is shorter than 20 years.

Problems with a short lease

There are many problems with a short lease but the main one is obtaining a mortgage. Not many mortgage companies will provide finance on a lease that is short.

If you were not buying the property at an auction, then the solicitors would advise you to try and get a reduction in the price or agree with the seller to extend the lease. At auction there is no negotiation, you need to be sure you want to buy it. Do not place a bid unless you are sure you want the property.

Another major problem with a short lease relates to how you go about getting an extension.   You should only exchange contracts for the purchase of a property on a short lease if you have a clear idea of how you are going to go about extending the short lease and how much it would approximately cost you. Remember, the shorter the lease, the pricier it will be for you to extend it. Ideally, you will want the lease extension to be done before you buy the property so that you buy the property with a lease that has been extended. Sadly, that is very unlikely to be possible when you are buying a property at an auction.

It may be the case, as it often is, that the seller has already served a notice to extend the lease on the freeholder but the right to extend the lease passes to you only once completion has taken place.  This means that once you have completed, you can then get the extension, but this can take some months to achieve, and if you and the landlord cannot agree on the terms, it can take even longer.   In the meantime, you have to pay the balance of the purchase price on completion, which means you need to raise all of the money, which can be difficult due to the short lease. 

If, however, the seller has not served a notice to extend on the freeholder, a subsequent extension of the lease after completion has taken place can be very costly and you should consider whether you can afford it.  You will need to wait two years before you can commence the formal lease extension process during which time the lease has continued to reduce, so that the extension will cost more.  This can mean that the purchase is suddenly not as good a deal is it looked!

Do your research and investigation prior to auction

When buying at auction we always advise clients to do a full inspection.  Where possible, do a physical inspection of the property, and, ideally, check whether there are any legal issues surrounding it or its owners before placing a bid. Remember that after the bid has been successful, it will be too late because you become legally obliged to complete the transaction within the timeframe that has been indicated.

Most legal documentation relating to the purchase of a property at an auction can be difficult to follow due to the volume of papers and the legal jargon.  If you are unsure about, for example, the meaning of a specific clause or a term, it is advisable to call in the professional from an early stage to shed some light on what it all means.

Assuming you have completed your research and investigation before the auction, then you can decide what you are going to do next.  This would include getting the lease term checked to ensure you have a clear plan.

Once the hammer comes down, this is when the exchange of contracts happens! There is no going back if you then find out you do not want the property because, for example, it turned out that it has severe defects, a short lease or a restriction on planning and usage.  

We would recommend going to the auction with a clear idea of what the property is worth, taking all the information into account, and then not offering more than that price.  In particular, we would suggest that it is unwise to exchange contracts on a short lease unless you have a clear plan of what you are going to do.

Disclaimer – our articles are designed to give you guidance and information.  There is no substitute for proper direct advice, particularly as everyone’s circumstances are different.