Buyers are wary of buying properties on a short lease (usually determined as one that has anything from 65 to two years left to run). Foreigners, for whom the concept of leasehold property is almost an anathema, are particularly circumspect and many mortgage companies are similarly disposed against them. However, they can be a cost-effective way of buying a property in a prestigious location, but there are risks to consider and homework to complete before you choose this option. For those looking for a long-term investment, the key to a successful short-lease purchase revolves entirely on being in a position to apply for and receive a lease extension.

The price of failure is high: the property titles revert to the landlord/freeholder at the end of the term. When buying a property that has a short lease, the first step is to have your solicitor verify that the vendor is in a position to assign you the lease. Depending on the years left on it, the turnaround time for an application to extend could be the hinge upon which the fortune of the investment turns. The less the amount of time remaining, the more complicated the extension process is and the more expensive it will be. This is essential if the lease only has five years or less to run,as the vendor may not be in a position to assign. Amendments to the legislation surrounding leasehold extensions have moved to assist tenants in this complex process.

The most recent, in 2002, means that in order to qualify for an application to extend, the tenant must have owned the property (although does’n’t have to occupy it) for two years before the date of the claim, and that the original lease be for a term of more than 20 years. It’s also important to understand that not all estates are governed by the same laws. Although lease extensions are usually granted in 90-year blocks, this isn’t always the case for properties owned by the National Trust, English Heritage and the Crown Estate.

The Grosvenor Estate won’t grant a long lease for a property on a 20-year short lease, but usually tops it up by another 20 years; the Crown Estate will negotiate, but it isn’t compelled by law to grant extensions. In terms of financing this sort of purchase, there will be two lump sums to pay: the first is the purchase of the property and the second (usually larger) is the cost of the lease extension.

The reason that short leases cost so much to extend is because, as the clock ticks down below 80 years, the ‘marriage value’ the latent value released whenthe lease is extended becomes more expensive. A general formula is applied where you pay for the existing unexpired lease term, half the marriage value and ‘compensation for any loss in value of other property owned by the freeholder that would occur as a result of granting the extended lease,’ explains Kevin Ryan, director of Carter Jonas London Residential. Richard Barber from Knightsbridge-based agents WA Ellis, acting for tenants and the Cadogan Estate, says that often the cost of buying the short lease is covered by the increase in value of the property once the extension is granted. ‘Buy a short lease now and, in a few years’ time, [once you’re ready] pay more to extend it.’

The only downside to this strategy, says Dawn Carritt of Jackson-Stops & Staff, ‘is that you might become sidetracked by marriage and embarking on paying school fees, which could make it tricky to find money in a hurry.’ Clearly, the key to success is to hire an expert to help with the negotiations. ‘This is a great way to get that London bolthole,’ adds Miss Carritt, ‘but you must get specialist advice. Costs can be high you pay the landlord’s legal fees as well as your own and remember, the Estate’s lawyers are not there to point out your mistakes.’

checklist for short leases

1. Check the length of the lease when it was granted to the vendor (it should have been more than 20 years)

2. Does it refer to the surrender of previous leases?

3. Check ground rent andreviews. If the lease states rent goes up by a percentage value, it could make the enfranchisement more expensive

4. Make sure you can alter the property 5. Get advice from a solicitor and surveyor who both specialise in short leases

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