Now is the time to opt for short leases

7 December 2009, Al Nisr Media – Property Monthly (Dubai)

A large proportion of the client base of Black Brick Property Solutions, one of London’s leading independent buying agents, comes from the Middle East, and one issue the company regularly comes across is the fact that these buyers tend to have a total aversion to buying property with a short-lease, and will usually only consider properties that are freehold or a share of freehold.

The reason for this is mainly due to the fact that most property in the Middle East is owned freehold, and therefore leasehold is an alien concept, as it is to many foreign buyers. But ruling out properties with a short lease cuts off a huge section of the market, particularly in sought-after London areas such as Knightsbridge and Mayfair.

With the current market in prime central London so short on supply, ruling out these properties makes trying to secure the ‘ideal’ property even harder. The company naturally advises its clients on both the benefits and potential pitfalls of buying a property with a short lease, but in a market that is short on supply as the current one, it can be a sensible option.

As one would expect, a property on a short-lease is cheaper to buy than it would be with a long-lease, or held freehold. This may enable a buyer to acquire an asset that would normally be above their price range. There is then the opportunity to either extend the lease, or hold the property for a time before reselling. In most cases it is advisable to apply for the lease extension – or enfranchise – in order to retain the value of the asset and remove any ground rent that may be payable. Depending on the circumstances, there can also be a valuation advantage to purchasing a short-lease property with the view to immediately pursuing either of these options, rather than buying a property that already has the freehold or a long-lease.

The common misconception that foreign buyers have is that they will be refused the right to a lease extension. The Leasehold Reform Housing and Urban Development Act 1993 is legislation which entitles the tenant of a flat to an additional term of 90 years, at a peppercorn rent. The additional 90 years is added to the present unexpired term. For a house, it might be possible to enfranchise and purchase the freehold interest. In both cases, any ground rent payable under the existing lease is removed.

Within Prime Central London, where short-leases are commonplace and mortgage finance is not normally required, buyers are more familiar with the concept of leasehold, and sales of leases with fewer than five years unexpired are not unusual.

Elsewhere in the UK, particularly where mortgages are required, the perception is different. There are also fewer funding products available for shorter leaseholds. The legislation makes an important distinction between leases that either have more or fewer than 80 years unexpired. Once a lease falls below this marker, the calculations become more complex and the costs can increase considerably.

Black Brick Property always suggests that its clients obtain independent advice from a firm of chartered surveyors who specialise in leasehold reform and who can advise and guide its clients through the process.

To conclude, buyers shouldn’t be put off buying a property with a short-lease. There can be advantages, particularly in a falling market, where the cost of obtaining the extension will be less than in a rising market, and also in a highly competitive market, such is the current situation in London, where competition for the best properties is fierce. Considering properties with short-leases may mean you get a better deal as there will be fewer buyers competing for the same property. As with any complex transaction, seeking good advice is crucial.

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