Short leases; big opportunity or tall order? We asked Child & Child’s Katie Cohen and Mo Hakim and Prosper Marr-Johnson of Marr Johnson & Stevens to put together the definitive crib sheet…
Buying and selling short leases can be a complex concept for many to understand. Many prospective buyers do not understand what is meant by the term “leasehold,” “short lease” and “Lease Extension.” This article aims to explain those terms and provide an overview of our experience of acting for buyers and sellers with short leases within Prime Central London (PCL).
Many buyers do not realise that a house as well as a flat can be leasehold. Although this article primarily focuses upon short lease flats, the process for acquiring the freehold of a house can be a profitable exercise so long as the right professionals are engaged to act and the correct valuation advice is sought.
The general and basic concept of a Lease is a contract between a landlord and a tenant for a nominated number of years (referred to as “the term”) and will set out who is responsible for repairs, the upkeep of common areas, insurance and what you are allowed and not allowed to do. As an example, a common question of late is “can I install wooden flooring?”, but it is the lease that determines the answer. The lease will also set out details of who has to contribute towards management expenses and how much that contribution will be.
It is often left until the decision to sell that the full implications of a short lease value is properly understood. In general terms, the longer the lease the better and those with over 100 years remaining are not normally a problem from a valuation perspective. The value of a lease is represented by a diminishing curve which accelerates down towards zero by the time the lease runs out. Legislation states that where the lease has less than 80 years remaining the payment to the Landlord will have to include 50% of the marriage value (this term is explained in more detail below) when the leaseholder acquires a lease extension. The second problem when selling a short lease is that the majority of mainstream mortgage providers, as a rule, refuse to lend to a purchaser on lease terms of less than 55 years, so anything shorter will only be available to buyers who are paying 100% cash.