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Extending the Leasehold

buy to let May 07, 2017

THE QUESTION

With an inherited BTL I’m about to purchase another property.  This is a two-bedroom maisonette with 53 years remaining – but with only 53 years on the lease.  I know this needs to be extended to make the property viable for a BTL and have researched the process – so I know what to do and how to do it, but how difficult is it in reality?

THE ANSWER

It is not hard to extend a lease; you just enter negotiations with the freeholder and agree a price.  The cost is progressively greater the fewer years left on the lease.

Negotiations to extend a lease can begin when the remaining term drops below 80 years. You would be very well advised not to negotiate on your own behalf, but engage a solicitor or other suitably qualified person highly conversant with leasehold law to negotiate on your behalf. Choose a solicitor that specialises in leasehold law.

Clearly you cannot agree a price to pay for this flat until you have clarity on how much it will cost you to extend the lease.  The profit in the deal is based on the increase in value of the flat being a significantly greater amount than it costs you to extend the lease.

You need to be aware that, in a stagnant market, the value of such a flat will reduce as each year of the lease ticks down to zero, when the flat reverts to the ownership of the freeholder.

There are issues you need to be aware of:

  • The freeholder is not bound to enter negotiations with the leaseholder until the leaseholder has owned the flat for a minimum of two years. You can request the freeholder to negotiate an extension of the lease, but they are free to ignore your request.  However, after two years of ownership you are entitled to issue a Section 42 Notice, which compels the freeholder to enter negotiations to extend the lease
  • Mortgage lenders require the lease to have between 25 - 45 years (depending on the lender) plus the term of the mortgage, which means you won’t get a mortgage with only 53 years on the lease. You will need to have the cash to purchase this flat outright
    If you collaborate with the current owner and they negotiate with the freeholder to extend the lease, they can issue a Section 42 notice immediately. When the lease extension is agreed, it must be written into the agreement that it is assignable to any new buyer of the flat.  That enables you to buy the flat with its short 53 years lease and immediately trigger the lease extension.
  • It is likely that the reason the current owner has not extended the lease themselves will be they do not have the cash, or the ability to borrow the money, to extend the lease. They probably don't even have the cash to pay for the legal costs of negotiating the lease extension.  This means that any collaboration will involve you paying for these legal expenses.
    To protect yourself against the current owner allowing you to do that, then selling the flat to someone else you need to tie the owner in so that, from the point you enter lease extension negotiations, they can only sell the flat to you at an agreed price and there are two recognised ways that you can do this:
    • An exchange of contracts conditional on the lease extension being granted
    • An option agreement which prohibits the owner from selling to anyone else during its duration and gives you the right, but not the obligation to buy at the agreed price

Even if you can do all of the above, you still will not be able to get a mortgage to buy the flat because you are still buying a flat with a 53 year lease at point of purchase and mortgage lenders will not recognise the validity of the lease extension agreement. Thus you must buy the flat first, extend the lease, then get a mortgage on it.

This will still require you to purchase the property with cash, but it does open up another way to finance the purchase by using bridging finance.  Bridging lenders will finance the purchase, knowing that you can extend the lease and thus obtain a mortgage which will be used to repay the bridging loan within a matter of months.

Lastly, the owner of this flat should be aware that it is not mortgageable and that their only option is to sell to a cash buyer (or a savvy buyer that knows how to leverage bridging finance).  This means they should be prepared to accept offers below the asking price for someone that can actually complete on the purchase. How much below the asking price they will accept will depend on their motivation to sell; do they need to sell quickly or can they afford let the flat sit on the market indefinitely?

This type of purchase, when negotiated and structured with skill, can yield a sizeable profit and it is a recognised strategy of being able to buy at a discount, add value over a matter of months, refinance based on the higher value created by the extended lease and recycle your cash out and onto your next deal.

 

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