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22 December 2015
Leasehold hold-ups – home movers and first time buyers beware
- Number of properties needing a lease extension increases by 140%
- Situation set to affect 10,000 home movers by 2020
- Top tips for sellers and first time buyers on navigating leasehold holdups
My Home Move, the UK’s leading provider of mover conveyancing services, has seen a 140% increase in the number of properties needing leasehold extensions since 2011; costing home movers tens of thousands of pounds per extension, alongside weeks of additional negotiation and stress before a sale can be completed.
Completing thousands of leasehold transactions a year, My Home Move, the market leader, predicts this situation is likely to get worse over the coming months and years; and is likely to affect up to 10,000 transactions a year by 2020*. This is due to the number of leases created during the height of the 1970s and 80s development boom edging toward their 80 year renewal dates, and the demand for leasehold properties increasing as more first time buyers join the property ladder** - meaning the already stretched housing market is likely to come under even greater strain.
Commenting, Doug Crawford, CEO of My Home Move said:
“Buying a leasehold property, such as a flat, is often the only affordable option for a first time buyer. However, these transactions can often come with hidden surprises in the guise of short leases, ground rent arrears and sinking funds, making them more complicated and expensive than buyers realise.
“We estimate that thousands of properties will enter the market over the coming months with short leases, costing sellers tens of thousands of pounds to extend, resulting in additional delays to home movers and, in particular, first time buyers as they work to secure a mortgage. This added pressure, on an already overextended housing market, could cause some real problems.”
Data based on My Home Move’s Management Information and estimated national figure, using My Home Move’s market share. 2011-2014 =140% increase in cases needing a leasehold extension.
Tips for avoiding delays and securing a leasehold sale
If you’re thinking of selling your leasehold property, check the remaining length of the lease before putting it on the market. If it’s less than 80 years, you may need to extend it.
- Extending it will cost you money, but in return it will make it more marketable and help you to secure a quicker and simpler sale, with a top end valuation.
- If it’s a flat and you own a ‘share of freehold’, talk to the other freeholders – you may be able to extend without payment.
- The sooner you can extend your lease, the better-off you will be financially, as the cost of the extension will go up as the remaining term of the lease goes down.
- Even if you can’t complete a lease extension before the sale, an agreement with the freeholder will save you time in the future.
- If a lease extension is needed, and you can’t agree it, some mortgage companies may refuse to lend on the property. If you bought the leasehold property more than two years ago you will have a legal right to buy an extension. This is called a “Section 42 Claim”, but it can take a long time, and be costly. Being aware of the situation will help you evaluate offers and be prepared.
- If you bought your leasehold property less than two years ago, you will not have the legal right to buy an extension, so if your freeholder does not agree to sell an extension, or demands a high price, this will impact on the value of your property and who can purchase it. Again, being aware of the situation will help you evaluate offers.
Tips for potential leasehold buyers (using a mortgage)
- Before viewing any leasehold property always check the length of the lease remaining with the estate agent or the seller.
- Be aware. Sometimes a leasehold property may seem cheap, but needs an extension. Sometimes a leasehold property is marketed at a full price in the hope that potential buyers are not aware of the need and cost for an extension. Factor that in to your offer price. You may get a good buy.
- Sometimes flats are offered with a ‘share of freehold’ which means that you are one of the freeholders too. Often in these cases lease extensions can be done without payment, but not always. Ask.
- If the lease has below 80 years remaining, see a mortgage advisor. They will guide you which lenders will lend. In a competitive market this may give you the edge over someone else who might come unstuck later on.
- It is usually the responsibility of the seller to extend the lease with the landlord. The cost of doing this can be tens of thousands of pounds as the freeholder expects to be compensated while the lease is in place. In most cases the seller and freeholder will extend the lease by agreement. Sometimes the seller has to claim the right to extend the lease, then pass this on to the buyer to complete afterwards (because otherwise the buyer won’t have the right until they have owned the property for two years). This is called a “Section 42 Claim”. It can be very complicated and costly – so ordinarily, it is far better to get the lease extended before the sale.
- If mortgage lenders won’t lend because the lease is too short, you will need to ensure the seller negotiates a new lease before the sale can proceed. But everyone will know where they stand, so this will avoid wasted time and money.
- Remember that you may have to buy an extension in the future. If you need to sell or remortgage within two years of buying that may be a problem.
Tips for potential leasehold buyers (cash buyer)
- A leasehold property with a shorter lease can be an attractive investment purchase at the right price because it will yield a better income return, or because by extending the term yourself you will make it more marketable.
- Remember, the shorter the lease, the less value there is in the property, so you may wish to negotiate on the final sale price to reflect this.
- Remember too, that you may have to buy an extension to sell or raise secured finance on the property. This may be a problem if you need to do so within two years of buying.