"When you buy a short lease, you’re not just paying the purchase price. You’re also going to have to pay a premium to extend the lease. Some people pay full price for short leasehold flats, not realising that there are additional costs."
- Andrew Binstock - Auction House London
For buyers on the lookout for a bargain, an apartment with a very attractive guide price is bound to catch the eye. On the surface, this promises a significant profit, but what these buyers may not realise is that the lease of this property may also be getting low.
Auction House London auctioneer, Andrew Binstock says: “The number one problem that we see is that some buyers don’t realise the difference between a flat with 125 years left on the lease and a flat with just 25 years."
Short leaseholds
A short leasehold investment can be a bit tricky for several reasons.
Andrew explains: “Short leaseholds start to get a bit difficult for buyers because banks typically won’t lend a mortgage for a property that has a lease of 80 years or under.
"Mortgage lenders are wary because as a lease shrinks, so too does the value of the leasehold, which is why you’ll see some attractive auction guide prices.
“When you buy a short lease, you’re not just paying the purchase price. You’re also going to have to pay a premium to extend the lease. Some people pay full price for short leasehold flats, not realising that there are additional costs.”
The exact price of this is “the million dollar question”. As Andrew points out, “until you engage with the freeholder, you never really know”.
A key thing to factor into this is that the shorter the lease, the higher the cost to extend the lease.
This is because the premium paid to the freeholder includes the ‘marriage value’ if the lease falls below 80 years. This works out the value of a flat with a short lease compared with an equivalent flat with a long lease. The difference between the two has to be split equally between the leaseholder and the freeholder.
Andrew provides an example: “Let’s say that the value difference between a flat with a 50-year lease and one with 125 years is accepted as £50,000. As the leaseholder, you’ll have to pay a marriage value of £25,000 to the freeholder. The marriage value isn’t easy to work out, and buyers often make the mistake of underestimating it.”
On top of this, you may need to wait two years before you make any move to negotiate.
How to make money on a short leasehold
But all is not lost if buyers are interested in a short leasehold property.
“If you and the freeholder come to a nice arrangement that you’re both happy with, you could still end up with a deal,” says Andrew.
“If you're buying something worth £200,000 for £150,000 and then pay £25,000 marriage value, you're still getting something cheap. It's still £25,000 better than paying the full value of a property with a long lease.”
There are also ways to bypass the two-year waiting period before you can start negotiations. “We often advise sellers to offer the property with the benefit of serving a Section 42 notice to save the next person in line the trouble of waiting,” explains Andrew.
In addition, this situation may change in the not-that-distant future. The Leasehold and Freehold Reform Act 2024 was passed before the new government took over, which set out to remove the marriage value and increase lease extensions. Leaseholders and freeholders must now wait to see it enacted.
If buyers are interested in turning short leases into profits, Andrew’s final words of advice are: “Don't buy something you don't fully understand the implications of. But if you have the knowledge, you could find a great deal.”
