Buying with a Short Lease

The opportunity may arise to purchase a property with a short lease that will need to be extended as part of the conveyancing process.

Why should I buy a property with a short lease?

A property with a short lease may be a good investment as the buyer takes the responsibility for extending the lease. There is also a much smaller market of potential buyers as standard mortgage lenders do not offer financing for short leases so generally buyers are cash buyers who will often pay less than market value.

What do I get when I extend my lease?

You can be assigned the right to extend the lease from a seller when purchasing a property provided that the seller qualifies to make a statutory lease extension claim. When you use the formal statutory process to force your landlord to grant you a lease extension, you will be entitled to an additional 90 years on top of the existing term of the lease plus your ground rent will fall to nil (also known as ‘a peppercorn’) from the date that the lease extension is completed.

For example, if you have a lease that has 82 years remaining when you serve the lease extension notice, then once the lease extension has been completed, you will have a lease that has 172 years remaining on the lease term and you will not need to think about extending the lease again in your lifetime. In addition, your ground rent will be abolished so there will be no ground rent payable for the remaining 172 years.

How does the seller qualify to make a statutory lease extension claim?

To qualify for a lease extension claim, the seller must meet the following conditions:-

  1. The seller must have owned the property for two years before a lease extension claim notice can be served on the landlord; and
  2. The flat must be held under a long lease (a lease which was originally granted for a term of at least 21 years); and
  3. The lease must be a residential lease of a flat (not a business or commercial lease).

What is the cost of extending my lease?

The total cost of extending your lease will be comprised of the following:-

  1. Premium – this is the payment that will be made to the landlord in consideration for the grant of the lease extension. You will need to instruct a specialist lease extension valuer at the outset to advise you of the estimated premium payable for the lease extension and to advise you of the initial offer premium to put forward to the landlord.
  2. Your solicitor’s costs – this will include the cost of your solicitor plus any applicable disbursements incurred, for example, Land Registry fees, Tribunal fees, bank charges, stamp duty, etc.
  3. Your valuer’s costs – this will include your specialist lease extension valuer’s costs in connection with providing an initial valuation report to you of the expected premium payable for the lease extension and the costs to negotiate the premium on your behalf to ensure the lowest possible premium is paid for the lease extension.
  4. Your landlord’s reasonable costs – this will include the reasonable costs of the landlord’s solicitor and valuer, plus any of the landlord’s disbursements in connection with the lease extension procedure. It is important to note that you are not responsible for any of the landlord’s costs in connection with negotiating the premium or any protracted negotiations in respect of the terms of the new lease. If the matter ends up being determined by the Tribunal then you will not be responsible for the landlord’s costs in connection with any preparation or attendance at the Tribunal hearing.
  5. Administration costs – if there is a third party to the lease, such as a management company, then they may charge a small fee for arranging to approve and sign the lease on behalf of the third party.

In addition, the landlord is entitled to request 10% of the premium offered to them in the initial notice as a deposit at the outset of the lease extension. This will be deducted from the final agreed premium on completion of the lease extension or if for any reason the lease extension does not complete, then the landlord may deduct their reasonable costs from the deposit and then must return any balance to you.

How long will it take to extend my lease?

We usually estimate that the procedure will take 6-12 months from the service of the initial notice to completion of the lease extension.

It is important to note that once the offer notice is served on the landlord to commence your claim for a lease extension the valuation date is ‘crystallised’. This means that the premium payable to the landlord is calculated in accordance with this fixed date (and the term that is left on the lease on this fixed date). Therefore, it doesn’t matter if the lease extension claim takes a year to complete, the premium is calculated based on the number of years left on the lease when the notice is served on the landlord and not when the lease extension completes.

We work with each client and their personal objectives to either speed up or slow down completion of their lease extension. For example, if a client wanted to ensure their notice was served as soon as possible to crystallise the valuation date but wanted to delay the completion of the lease extension (and the payment of the agreed premium to the landlord), we would seek to delay the process for you. Conversely, if you are trying to sell or remortgage your flat and would like to complete the lease extension as soon as possible then we would work with all the parties to try and accelerate completion of the lease extension.

Please note that the Land Registry is taking around 6 months to register a new lease after completion of a lease extension, however, if you are intending to deal with the property (for example, sell or remortgage), then we can provide the Land Registry with evidence of an impending transaction and request that they expedite the registration.

What is the procedure for buying a property with a short lease?

Conveyancing Procedure

Once we have been instructed, we will confirm that we are instructed to the seller’s solicitor and request the initial draft contract and supporting title documentation including a copy of the lease to the property. We will then submit an environmental search, a water and drainage search, a local authority search, and any other relevant searches in respect of the subject property.

We will then review the paper work and raise any necessary enquiries with the seller’s solicitors which will include management and service charge enquiries which will be raised with the landlord or its appointed managing agent. Once the enquiries have been answered satisfactorily and we are in receipt of all search results, we will write a report to you on the title of the property which summarises our investigations.

If you are then happy to proceed with the purchase, you will pay the 10% deposit to our client account and sign the contract in readiness for exchange of contracts. On exchange of contracts the agreed completion date will be entered into the contract.

We will then send you a statement of account requesting the balance due for completion and request the mortgage funds from your lender (if required). On the day of completion, we will transfer the completion monies to the seller’s solicitor and you will then collect the keys to the property from the agent.

Following completion, we will deal with the post-completion matters, such as registering the Transfer Deed at the Land Registry and paying the stamp duty.

For further information about the conveyancing procedure and our associated fees, please see below:-

Purchase of a Freehold Residential Property

Purchase of a Leasehold Residential Property

Remortgage of a Freehold Residential Property

Remortgage of a Leasehold Residential Property

Lease Extension Procedure

At the same time as carrying out the conveyancing process, we will prepare the section 42 notice (the formal offer notice) which will be approved by the seller’s solicitor and signed personally by the seller. We will also prepare a Deed of Assignment which is the Deed which will assign the benefit of the lease extension claim from the seller to the buyer and some additional special conditions for the contract to set out the agreement between the buyer and the seller in respect of the lease extension process.

Between exchange of contracts and completion of the purchase, the lease extension procedure is formally commenced by the formal offer notice (the Section 42 Notice) being served on the landlord in the seller’s name offering the premium (which must be realistic) that you are willing to pay for the lease extension which will be advised by your specialist lease extension valuer. The formal offer notice must provide a deadline which is at least two months from the date of the receipt of the formal offer notice by which the landlord must respond with their formal counter-notice.  We will always seek to serve the section 42 notice on the landlord as agent for the seller to ensure that it is validly served.

The Deed of Assignment will be signed by both the seller and the buyer and completed simultaneously with the purchase of the property. Following completion of the purchase, the Deed of Assignment and Transfer Deed will be served on the Landlord.

The Landlord may respond to the formal offer notice in the following three ways:-

  1. Admit that the tenant has the right to extend their lease but dispute the premium offered. The landlord must then provide a counter-offer of the premium that they will accept for the lease extension.
  2. Admit that the tenant has the right to extend their lease and accept all the terms in the formal offer notice including the premium offered. In this case the lease extension would proceed to completion.
  3. Dispute that the tenant has the right to extend their lease (there are very limited ways that the landlord can dispute a statutory lease extension claim). The tenant can then apply to the court for a declaration that they are entitled to extend their lease.

The landlord may not respond at all in which case the tenant is entitled to their lease extension on the terms set out in their formal offer notice, including the premium offered.

In the vast majority of lease extension cases the landlord will proceed via option 1. Following option 1, after the freeholder serves their counter-notice, there is an initial period of six months from the date of the counter-notice during which the parties’ valuers will enter into negotiations with a view to agreeing the premium and the parties’ solicitors will enter negotiations with a view to agreeing the terms of the new lease.

If the premium and/or terms of the lease cannot be agreed within this six month time period then an application will be made to the Tribunal so that the Tribunal can determine the premium payable and/or the terms of the lease. A Tribunal date will be set approximately 4-6 months after the application is made. The parties can continue to negotiate the premium during this time period and if all the terms of the lease extension (including the premium and terms of the lease) are agreed before the Tribunal date then the Tribunal proceedings can be vacated.

Once the terms of the lease extension are agreed between the parties or determined by the Tribunal, the parties have up to a maximum of four months to complete the lease extension, which is when the premium and associated costs are paid to the landlord’s solicitors.

Following completion of the lease extension, we will deal with all the post-completion formalities on your behalf, including paying stamp duty (if any) and registering the new lease at HM Land Registry.

How can LEASE Law assist you?

LEASE Law are specialist solicitors who can act on your behalf in respect of both the conveyancing and the lease extension when buying a property with a short lease and we can also guarantee that one solicitor will be dealing with both matters on your behalf so there is no disconnect between the two matters.  In the vast majority of cases, we are able to offer a fixed fee for acting in respect of both the conveyancing and the statutory lease extension.

The work that we will carry out for you includes submitting the conveyancing searches, reviewing all the draft contract paperwork, raising any necessary enquiries, preparing a report on title, preparing for exchange of contracts, completing the purchase transaction, paying the stamp duty, registering the purchase at HM Land Registry, preparing and serving the initial offer notice and deed of assignment on the landlord in respect of the lease extension, receiving the counter-notice from the landlord, negotiating the terms of the new lease, completing the lease extension and registering the lease extension at HM Land Registry. We will also liaise with your valuer in respect of the premium when necessary.

We can also recommend specialist lease extension valuers who have extensive experience and expertise in this area to ensure that the premium that you pay for the lease extension is as low as possible. Your valuer will provide you with an initial report which will advise you on the premium that you can expect to pay following negotiations and will also recommend the offer premium to put into your initial offer notice. Your valuer will also negotiate the premium with the landlord’s valuer on your behalf following the service of the initial notice.

Please contact Jade Wilson (jade@leaselaw.co.uk or 0204 511 9100) or Joanna Botley (joanna@leaselaw.co.uk or 0204 511 9101) for a no obligation discussion about your potential purchase of a flat with a short lease.