If you own a leasehold property, you may be glad to know that selling with a leasehold is simpler than it looks. All it takes is a little planning and a few extra documents.
This guide will help you understand your lease, how it affects the sale of your home, and how to get your property on the market for the best price possible if your lease is short.
What does it mean to own the leasehold?
If you own a flat, you probably own the leasehold instead of the freehold. Most flats in the UK come with leaseholds. It’s entirely normal, so it shouldn’t put potential buyers off.
Owning the leasehold means that, while the flat (or other property) itself is yours, the ground it stands on and the communal areas of the building belong to the freeholder. The freeholder is the person who owns the land.
Leaseholders pay ground rent and a service charge to the freeholder, often annually. The freeholder uses this money to maintain all the communal areas, like shared gardens and the building as a whole.
If you’re a leaseholder, your lease – your right to stay on the freehold, and your obligation to pay towards upkeep – doesn’t last forever. When the lease is finished, ownership of the property technically transfers back to the freeholder. This rarely happens, though, because you can keep extending the lease. In fact, if you’ve been the leaseholder for two years or more, an extension is your statutory right.
How long is left on my lease?
Before you put your flat on the market it’s important to find out how many years are left on your lease, as a short lease is likely to impact the sale price. Your solicitor or conveyancer should have given you a copy of the lease when you bought your home. If you can’t find it, get in touch with HM Land Registry – they can provide you with one for a fee.
It’s important to know how long is left on your lease, because a lease of 80 years or less can negatively impact the price of your property.
What happens if my lease is short?
When you have 80 years (or less) left on your leave, extending it becomes more difficult and expensive, because after this point the freeholder takes 50% of your property’s ‘marriage value’.
Marriage value is the amount of extra value a lease extension adds to your property. As you can imagine, it may add up to quite a bit.
It’s still possible to sell a property with a short lease, although it will probably have a negative effect on the asking price. Buyers will find it harder to get a mortgage on a property with a lease of less than 80 years, and below 60 years they may not get one at all. This means that if you choose not to extend, you may be limited to cash buyers or a sale at auction. So, if your lease is coming up to the 80 year mark, it’s a good idea to extend it.
How to sell a leasehold property
Selling a leasehold property is just like selling any other property. There’s a little more paperwork to hand over, but your solicitor or conveyancer will know how to deal with it. Things only change if your lease is short, in which case it might be hard to find a buyer.
Luckily, there are two main ways to make your sale easy and successful if you have a short lease: extend the lease, or buy the freehold.
Option 1: Extend your lease
Extending a short lease will add value to your home. It pays not to extend it too soon, though, because if you have 95 years or more left, the value an extension adds starts to drop.
Remember, you have the right (granted under the Leasehold Reform, Housing and Urban Development Act 1993) to a lease extension if you’ve held the lease for two or more years. And, if you start the extension process when your lease is at 83 years, it’ll stay at 83 years until the lease has been extended. As soon as you give formal notice that you want to extend, your lease is effectively frozen and won’t tick down to 80.
How much does it cost to extend a leasehold?
The price of an extension depends on many things, including the value of your home, the current lease length, and ground rent charges. Your estate agent should be able to give you an estimate of the cost, but only a legal professional can give you an exact answer, as it’s quite complicated.
You could ask other owners in your building what they paid for their lease extension, or use an online calculator, to get a rough idea of how much your lease extension will be. Don’t forget, though, that professional legal advice is essential before you ask for an extension.
Remember to take ground rent into account, too. If you extend your lease under the Leasehold Reform, Housing and Urban Development Act 1993, you may end up paying more. That’s because, under the deal, you no longer have to pay ground rent (known as a ‘peppercorn rent’), so the freeholder may charge you for their loss of earnings instead. If you extend your lease by direct negotiation with the freeholder, you won’t be exempt from paying ground rent unless you agree otherwise.
Is it worth extending your leasehold?
Many leaseholders decide it’s only worth extending when the lease is close to the 80 year mark, as the cost of adding 90 years (the most common extension) to a 95 year lease rarely outweighs the profit you’ll make when you sell. If you have a long lease but you’re spending a lot on ground rent every year, extending it under the Act could still be worthwhile, as the obligation to pay ground rent vanishes – which is a great selling point.
Option 2: Buy the freehold
If you have a short lease, another option is to club together with other leaseholders and buy the freehold.
Buyers are generally more attracted to flats that come with a share of the freehold, as being exempt from ground rent and service charge is a big benefit. As the freeholder, you’re also in control of maintenance and upkeep, so you can choose the provider who offers the best deal – unlike external freeholders, who may decide based on how much commission they get. If you have a long lease but the opportunity to buy the freehold comes up, it could still be a good investment.
Joining with other leaseholders to buy the freehold is called ‘collective enfranchisement’.
How does collective enfranchisement work?
Thanks to the Leasehold Reform under the Housing and Urban Development Act 1993, leaseholders who meet a certain set of criteria can buy the freehold together. If the freeholder is happy to sell, the leaseholders can buy the freehold from them. If the freeholder doesn’t want to sell, collective enfranchisement gives leaseholders the power to buy it at a fair price anyway.
Not everyone wants the responsibility of owning the freehold and the obligation that comes with it. Luckily, you only need 50% of leaseholders on board for collective enfranchisement.
You will have some more admin to do, such as ensuring the building is maintained properly and making sure everyone who’s part of the freehold gets their say, but the benefits are also significant. For example, when you buy the freehold, you still have to extend your lease, but it should be free!
Tips for selling your leasehold property
- Start deciding what to do with your lease as soon as you know you want to sell. Don’t wait for it to drop to 80 years or below, as it will cost time and may slow your sale down.
- Extending your leasehold or buying your freehold will help you get the best price for your flat. Both have their upsides, so decide which one works for you.
- Make sure you have a good conveyancer or solicitor, as extending your lease or buying your freehold can take a while, and it’s different for every property. They’ll also help you understand what you’re paying for and how long it will take before you commit.
- If you’re not sure whether it’s worth extending your lease, ask your local Yopa agent for advice. They’re experts in the local market, so they know what buyers are looking for.
