Every so often, perusing the pages of Rightmove, one will come across a property that seems too good to be true. Well as the adage goes, if it looks too good to be true, it probably is. Many a buyer will wait on the phone to the selling estate agent excitedly wondering what it would be like to live in that Chelsea flat or Hampstead maisonette that should be well outside of their price range, only to eventually be told that the reason the property is so cheap is that it has a short lease. This article is written for those of you in that very situation, who are wondering whether buying that short lease property is a good way to snap up a bargain, or a sure-fire way to open up a quagmire of financial heartache.
Arranging a mortgage
In the first instance you’ll need to ensure you have you have funds in place to complete the purchase. This might sound obvious, but when buying a short lease at auction it can be more complicated than it seems. Once the hammer falls you will be expected to pay 10% of the agreed purchase price upfront, and will have a fairly short time (typically 28 days) to come up with the remaining balance. If you are a cash buyer this might not be much of an issue but if, like most of us, you are taking out mortgage finance this doesn’t leave you much time to arrange the loan. Mainstream lenders are becoming increasingly wary about lending on short leases, with mortgage finance becoming difficult to obtain for leases with less than 70 years to run. You will therefore need to take advice from a specialist mortgage broker, and perhaps even obtain an ‘agreement in principle’ from a lender before making your way to the auction room. If you are unable to arrange your mortgage within the prescribed timescale you won’t be able to complete on the purchase and will lose your deposit! If caught between that ‘rock and a hard place’ you might be able to obtain a bridging loan from a specialist lender, but the rates are typically punitive. Don’t take the risk and make sure you have finance in place before committing to the purchase.
Can I extend the lease?
Most leases can be extended under the Leasehold Reform, Housing and Urban Development Act 1993, which gives leaseholders the right to extend their leases by an additional 90 years. However, the Act requires you to have owned the property for two years before you can force the freeholder to grant the lease extension. If you are purchasing a property with a short lease this can be circumvented by having the vendor serve a formal notice of claim on the freeholder and assigning it to you on completion of the purchase. You should therefore discuss the vendor’s circumstances with the selling agent, and confirm whether they are willing and able to serve and assign the notice.
The legislation entitles the freeholder to compensation for the grant of the new lease by way of a premium. This can be an expensive process, depending on the value of the property and the length of the lease. Premiums for particularly short leases in expensive parts of central London can rise to hundreds of thousands of pounds! As a further ‘fly in the ointment’ recent case law has stipulated that, when a property has recently been sold with a short lease the evidence of that transaction should be relied upon in calculating the lease extension premium. The result of this is, more often than not, a higher premium than would otherwise be paid. You will therefore need to take advice from a specialist Chartered Valuation Surveyor on the likely premium in order to ensure that you are able to obtain a lease extension at an acceptable cost.
It is all worth it?
There is a lot to think about when contemplating buying any property at auction, let alone one with a short lease. You’ll need to ensure that you have finance in place alongside a good idea of what it will cost to extend the lease. The required preliminaries will cost some money (surveyors don’t work for free) and this might be a little frustrating when there is no guarantee of being successful at auction. However, if you are willing to take the risk you might just be able to find a bargain and snag your dream home at a discount!