Selling a Property With a Short Lease

If you own a leasehold property, on a day-to-day basis you may not notice any differences from owning a freehold. However, leasehold means you do not own your property outright, only the right to occupy it for a set number of years. Your property is therefore a depreciating asset.

The difference between owning a leasehold property and a freehold one may be most apparent when you plan to sell it, especially if you have 90 years or less left on your lease. The fewer years left on your lease; the more difficult selling can become.

‘Selling a property with a short lease can be challenging,’ agrees Kimberley Rose, Deputy Head of our Residential Property Team. ‘However, it should not prevent you moving home provided you get the right advice and plan ahead.’

Kimberley outlines the key considerations.

What is a short lease and why does it matter?

There is no agreed definition of a short lease, and the point at which the number of years remaining becomes an issue can vary widely.

Usually, the effect is gradual. If your lease has a hundred years or more left to run, any impact is likely to be marginal. When there are 90 or fewer years left, you may start to find your property harder to sell. This is due to depreciation, and two additional factors which accelerate this effect:

• extending a lease costs significantly more once the remaining term falls below 80 years; and
• many mortgage lenders stipulate a lease must have a minimum term left to run, typically 70 years, for them to consider lending against it.

Although this is unlikely to affect you while you are living in your home, this could change when you come to sell. Most people expect to live in the property they are buying for several years. They will also want to be able to sell it on easily for a fair value.

As the remaining lease term gets shorter, your property is likely to appeal to fewer potential buyers, and inevitably this may affect the price you can achieve.

The issue with mortgage lenders

Mortgage lenders vary in their approach to short leases. A few will lend on leases with terms as short as 20 years. However, these tend to be niche and may charge a higher rate of interest.

Most mainstream lenders require a leasehold property to have a minimum term left, which can be anything from 55 years to 85 years. The shorter the lease term, the more potential buyers may struggle to find a suitable mortgage. This in turn may affect your property’s marketability. After a certain point, your property may only appeal to investors or cash buyers, which will impact the sale price.

The availability of mortgage finance is also something to consider when accepting an offer. A buyer who is relying on a mortgage to fund their purchase may run into problems. Being open about the lease term at the outset and ensuring your agent carries out due diligence on potential purchasers, can reduce the risk of a buyer pulling out of the purchase later.

Exercising your statutory right to extend your lease

As a leasehold owner you may have the legal right to extend your lease. Different rules apply depending on whether you own a flat or a house and, in either case, you will have to meet certain conditions. For example, as the law currently stands, you must have been a tenant for at least two years before applying. However, most leasehold owners will qualify. So, it could be worth discussing this option with your solicitor before you plan to sell.

The extension will be for an additional 50 years for a house, or 90 years for a flat. Legislation sets out the basis of valuation, which determines how much you must pay to your landlord for the extension. Valuation is a complex process, but generally it compensates the landlord for their loss. Consequently, it reflects both the ground rent payable (which as part of the process will be reduced to a nominal amount) and the impact on the landlord’s reversion. Generally, this means the shorter your lease term, the more you must pay to extend it.

In addition, if your lease has less than 80 years left, the valuation will also reflect ‘marriage value’ (the increase in value of your property because of the extension). This may increase the price you have to pay significantly.

There are online calculators which can give you an idea of how much you may have to pay. However, for a more reliable assessment, you should seek advice from an independent valuer. They will also need to be involved if you decide to proceed, as your landlord may not agree with your initial proposal. Overall, the process is complex, requiring the right notices to be given, and replied to, within a prescribed time schedule. So, it is also important to instruct a solicitor experienced in this area.

Extending your lease term - other considerations

If you rely on your legal right to extend your lease, the process could take anything between three months and a year. The actual time will depend on your landlord’s attitude and their solicitor. Using a solicitor who is proactive and who understands the issues involved will help ensure matters progress expeditiously. Even so, if you want to extend your lease before selling you should factor in additional time.

As an alternative, your landlord may agree to extend the lease voluntarily. This can be quicker, more straightforward, and sometimes less costly. However, it is important to ensure any agreement is correctly documented, otherwise you could still run into problems when you sell. Your solicitor’s input can be especially valuable here. It is known for some landlords to offer terms which are much less beneficial than those which you would be entitled to legally. A solicitor who fully understands this area of law can protect your interests.

Other options if you are selling with a short lease

Selling without an extension is an option. However, you may not achieve as high a price as you would like. The impact on price will depend on multiple factors, and you should take independent advice from a valuer who understands the local market. You can then get a realistic view of what you are likely to obtain and consider your options accordingly. You may also wish to consider different ways of selling. For example, if you have a very short lease, then selling through an auction may be appropriate.

If you do not want to renew your lease, but this is important to a buyer, you could agree to start the process and transfer your rights to your buyer. There will still be an element of uncertainty for the buyer, but they would not have to wait two years before applying for an extension, so this could be an acceptable compromise.

Leasehold law is changing

The Leasehold and Freehold Reform Act 2024 introduced some significant changes for leaseholders. These should make it easier and, in many cases, less expensive to extend a lease. For example, you will no longer need to show a two-year period of ownership before applying for a lease extension. In addition, marriage value will no longer form part of the valuation basis, so you may find it cheaper to extend.

Unfortunately, these provisions are not yet in force although they should be in late 2025 or early 2026. In some cases, you could be better off waiting until then to sell if you this would be an option. For example, if your lease already has less than 80 years to run, you may well find it significantly cheaper when the new law is in place. However, any benefit in waiting may be outweighed by other factors. Your valuer and solicitor can help you decide what is the right approach for you.

How we can help you

Selling a property with a short lease can be challenging, as the law relating to leases is complex and evolving. This makes it especially important to choose a solicitor who really understands this area, and how the law applies to your individual circumstances.

We welcome that challenge and would be happy to help you with your next move, whether you own a short lease or a more conventional property. For further information, please contact our Residential Property Team on 0800 542 4245 or email info@sillslegal.co.uk.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

Photo by Marla Prusik on Unsplash.