The Daily Mail recently featured a London flat which is on sale for less than £100,000. The article suggested that this could be one of the last properties in London to sell for below £100,000.
So what is the catch and why is the property so cheap?
It is a small studio flat in a 1930’s mansion block in Brixton – not the most expensive area of London, but you can pay quite a lot more for similar properties in the same location.
Part of the reason for the low price is undoubtedly the poor condition of the property – it is in need of a thorough renovation.
However a more significant factor affecting the asking price is the ‘Unexpired Lease Term’ (the number of years left on the lease) which has only 56 years remaining.
That might seem like a long time, but nowadays it is nowhere near long enough to satisfy mortgage lenders. For example at the time of writing, the Halifax require 70 years unexpired lease term from the date of the mortgage.
So it looks as if it could be impossible to get a mortgage on the property with many if not all lenders, hence the agents seeking cash offers.
Why the length of the lease is so important when buying a flat?
It is now virtually impossible to get a mortgage on a leasehold property if the unexpired term is less than sixty years at the time of purchase. As most buyers require a mortgage the value of a flat can drop sharply once that point is reached – as can be seen in the Brixton flat which is only available to cash buyers.
Many London property-buyers are now looking to buy flats or apartments rather than houses. And all flats, whether in a purpose-built block or in a converted house, are invariably owned on leasehold title. (You may see a flat advertised as having a ‘share of the freehold’ – this does not mean that it is a freehold flat, but that the freehold of the building is collectively owned by the flat-owners. The flat itself will still have leasehold title.)
Leases are granted for fixed periods – 99 years is a common figure, but leases of ex-council flats will usually be for 125 years. This period is known as the term of the lease – and of course as time goes by the unexpired length of the term gets shorter. When the lease expires, the property goes back to the land-owner.
So when looking to buy a flat it is not just a question of location, location, location. The price should reflect the length of the unexpired term of the lease. Less than sixty years, and it’s not worth considering unless you are a cash buyer.
If there a few more than sixty years left to run it can be worth considering, but the price should reflect the fact that unless the term can be extended the value will drop sharply once the sixty year point is reached.
And just to complicate matters further, there is another factor which will also affect the value of a flat when the lease falls below eighty years – as mentioned later on.
Of course some cash-buyers will welcome the opportunity to buy a flat with a short lease, as they can often be picked up quite cheaply. They can be worth considering as a buy-to-let opportunity, although it must be remembered that the capital value of the investment is likely to decline unless a lease extension is negotiated.
Other buyers with the cash available consider that buying a flat with a few years left on the lease can work out cheaper than renting a similar property for the same period – and gives a longer period of security. So the fact that the capital value of the property might disappear altogether would not deter them.
A lease extension will add value to your property – but costs money
Fortunately it is possible to get the lease term extended in most cases – but it does cost money and the process can take some time to complete. The majority of flat-owners now have the right to require the freeholder of the building to grant them a new lease for a term of 90 years over and above their present unexpired term, all at a peppercorn rent (that is, rent free).
However the flat-owner has to pay a premium for such an extension and the amount will be in inverse proportion to the length of the unexpired term – in other words, the less time the lease has left to run, the more you can expect to pay. Owners also have to pay freeholders surveyors and legal fees as well as their own.
How much will you pay for a lease extension?
The legislation does set out the basis on which the premium for a lease extension should be calculated. Although online calculators will give some idea of the amount you can expect to pay, the way in which detailed calculations are carried out is quite complicated. It is therefore best to ask an expert surveyor to carry out a proper valuation.
Surveyors acting for freeholders usually manage to come to a higher value than do surveyors acting for leaseholders, and when a figure cannot be agreed it may be necessary to refer to a tribunal for a decision.
When the lease has less than eighty years left to run the amount of the premium will be increased by something known as ‘marriage value’ – a complicated concept best left to expert surveyors. However this is a factor which will affect the value of a flat if the lease has less than eighty years left.
In order to take advantage of the statutory right a flat-owner must have owned the property for at least two years – so anyone owning a flat with a lease close to the sixty year point should seriously consider applying for a lease extension without delay.
This two-year qualification period presents something of a problem for buyers, especially when the lease term is already fairly short and it would be desirable to apply for an extension straight away. It is possible to arrange for the seller to serve the necessary notice and then assign the benefit to the buyer on completion – but the buyer then faces the problem of having to negotiate a price for the extension with the freeholder of the building, as well as paying all the fees.
Expert advice is essential
Getting an extension can be a complicated and lengthy process, especially if the freeholder is un-cooperative. It requires the service of statutory notices in the correct form, and on the correct person or company.
When buying any leasehold property or considering a lease extension it is essential to obtain expert advice from a Surveyor and a Conveyancing Solicitor.
Tony Lilleystone is Commercial Panel Director at Fridaysmove and has decades of experience as both a Conveyancing Lawyer and Legal Risk Manager.