Should I buy a flat with a short lease?

When you buy a house (apart from some exceptions) you buy what is called the freehold. You are buying the title of the land with the house on it. When you buy a flat, however, you buy in most cases the leasehold title of the property. In essence a freeholder (like the house owner) will own the land and building whilst you are buying a long lease of the flat. The leaseholder would tend to pay a small ground rent which mainly covers the cost of the buildings insurance.

Why are flats generally freehold?

Well a number of reasons. Firstly lets say that you buy the first floor flat in a 3 story building. Your floor is the ceiling of the ground floor flat and your ceiling is the floor of the second floor flat. You can’t both own floor/ceiling. Also let say there is an issue with the roof or walls generally who pays for it when it affects in most cases most of the owners of the flats? What if one flat owner pays for repairs to their walls but another won’t repair theirs that could still affect your wall potentially?

To cover this freeholder would appoint a management company to deal with these issues that could affect all the flat owners. The owners of the leasehold flats would pay a maintenance charge every month or 6 months in general to cover the cost or future cost of repairs needed to maintain the builder to an adequate standard.

When the flats are sold for the first time the freeholder establishes a separate lease agreement in each flat. The lease is valid for a number of years not indefinitely. In general, they tend to have 99 years, 125 years, or 999 years at the outset. As every year passes the remaining term on the lease reduces by a year. Mortgage lenders have a requirement that there must be a minimum term remaining on the lease agreement at the outset, or at the end of the mortgage term, or sometimes both. That varies between mortgage lender. Some lenders require a minimum of 85 years remaining at the outset, some are 70. Some don’t mind as long there are 50 years remaining at the end of the mortgage term for example.

So why does it matter?

Well once the remaining term on the lease goes lower than 85 and certainly lower than 70 it then means a certain proportion of mortgage lenders won’t lend against it. Given that’s the case then because of this reduced mortgageability it means it could be more difficult to sell if it’s more difficult to get a mortgage and thus the value of the flat reduces.

So once the remaining number of years reduces to a certain number to avoid this issue the lease needs to be extended. Now because the value of the flat may have reduced because the flat say only has 69 years remaining on the lease it would be conversely fair to say the value of the flat will increase if it is extended to say 125 years. The potential issue here is that any gain in value the flat will have achieved by extending the term on the lease needs to be shared 50/50 with the freeholder. So if say the value of the flat will have increased by £50,000 by extending the lease then as part of the lease extension you will need to give the freeholder £25,000.

If you already own the property then you might have to re-mortgage if it’s possible to raise the £25,000 in this example to pay the freeholder. This can potentially be a good earner for freeholders if every 15-20 years they extend the leasehold to 99 years.

One way where the above situation is avoided is if rather than a separate person or persons own the freehold sometimes the owners of all the flats collectively buy the freehold of the building from the freeholder. This then becomes what is know as commonhold.

Do you own research and get good legal advice

Whilst I am not a solicitor and therefore not qualified to give legal advice with regards to leases, I am fully aware of lender criteria with regard to it and you should seek legal advice. Your solicitor dealing with your purchase for example would advise accordingly. It may be the case that the lease might be being extended simultaneously to buying the flat.

So yes you may consider buying the flat if the lease is shorter because it may be being extended as part of the purchase or you may plan to extend the lease later on the basis you are buying it now at an affordable price reflected by the remaining term on the lease. Long leases avoid these potential issues but again do your on research before buying and find a good solicitor.