The upcoming Leasehold and Freehold Reform Act is set to make life easier for those wanting to get on the property ladder — and savvy buyers are taking advantage now.
At the moment, homeowners with leasehold agreements – commonly seen in flats – don’t own the land their property sits on, and need to make extra rental payments to the freeholder (sometimes known as a landlord).
But the new act changes this, making it both cheaper and easier for people to either extend their leasehold, or buy the freehold themselves.
While we’re still waiting on the act to become law (it’s recently been given Royal Assent), it means that people are now snapping up properties with short leases.
Previously, these homes may not have been an attractive investment, given the considerable time, paperwork – and money – required to increase the terms of a lease.
As such, they often stay on the market for longer than similar properties, or come with a lower price tag to reflect the additional cost to the new owner.
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But with the changes outlined in the Leasehold and Freehold Reform Act expected to come into force at some point this year, some are now speculating that getting in on short lease homes before the change will pay off later.
As Andrew Binstock, co-founder and auctioneer at Auction House London explains, buyers are increasingly keen to invest in homes that’ll need the lease extending in a few years’ time, in the hope that once this policy comes through, the renewal process will be a relative walk in the park.
‘Short leasehold flats are attracting strong demand – we have offered over 150 so far this year,’ Andrew told This Is Money, which he puts down to buyers’ growing confidence around the reform.
And, there are bargains to be had. A one-bedroom flat in upmarket Chelsea with just eight years left on the lease is up for auction with a guide price of just £120,000 – drastically below the area’s average sale price of £1,272,260. Do we smell a potential steal?
What is the Leasehold Reform Bill?
The Leasehold and Freehold Reform Act was passed in May 2024, but many of the measures are being introduced gradually.
In a nutshell, it will:
- Make it both cheaper and easier for leaseholders to either extend their lease or buy their freehold by removing the need to pay the freeholders’ costs and eradicating the marriage value (AKA the automatic increase in a property’s worth after the lease has been extended). At present, the leaseholder has to share 50% of the increased value with the freeholder, which can be costly.
- Increase the standard lease extension term to 990 years
- Give more leaseholders the right to take over management of their building
- Ban new leasehold houses (with a few exceptions)
- Require landlords to be more transparent about service charges.
Is it a bad investment to buy a home with a short lease?
As property expert and Yopa’s national franchise director, Steve Anderson, tells Metro, it takes a lot of effort to increase the terms of a lease – and it can also be expensive.
He explains: ‘The task becomes greater the shorter the lease term gets and, in worst-case scenarios, failure to extend a lease can not only hit the value of a home, but ultimately, see ownership transferred back to the freeholder.’
After buying a property, homeowners can ask to increase the lease term at any point – but as Steve notes, after two years, you’re entitled to a 90-year extension as long as you’re the qualifying tenant (AKA, the leaseholder who owns the property’s lease).
‘This is almost always the case if your original lease was for more than 21 years,’ he adds.
So, how short is a short lease? Generally speaking, properties with less than 80 years remaining fall into this bracket.
While the new law won’t change the definition of a short lease, it’ll increase the standard extension length to 990 years.
Historically, there’s been relative risk in buying a short lease home as it can make it harder to sell on in the future.
However, once the new laws have come into effect, it’ll be easier and cheaper to extend the lease anyhow. So, those buying a short lease home now might be hoping to snap up a cheap bargain, with the hopes of extending it and pocketing a profit later on.
What is the process of extending a lease?
Extending a lease can take anywhere between three and 12 months and involves the following steps:
- Notifying the freeholder of your intention to extend the lease
- Hiring a solicitor who specialises in leasehold extension, as well as a surveyor
- Submitting an offer to the freeholder
- Negotiating the terms of the extension with the freeholder and agreeing a price
- Paying the deposit, which should be done within 14 days of giving the leaseholder notice. This usually costs either £250 or 10% of the lease cost agreed in the notice
- Completing the lease extension by paying the extension costs, as well as any fees (i.e. to the solicitor and surveyor).
Can you save money buying a home with a short lease?
After the extension costs and legal fees have been accounted for, renewing a lease of 90 years can cost around £8,500. But with anything under 90 years, the fees can really start to stack up.
‘If looking to extend a lease of just 60 years, this cost increases to as much as £32,000, so it really does make sense to do this earlier rather than later,’ Steve says.
However, standard lease terms will be increased to 990 years with Labour’s new legislation (making a property more attractive to future buyers as they won’t have to renew again down the line) and sometimes hefty ground rents could be ’essentially reduced to zero [known as a peppercorn] upon payment of a premium.’
‘Leaseholders will be able to extend their lease by a new standard 990 years with a ground rent at zero,’ Steve adds.
‘This is a substantial increase from the previous 90-year extension for flats and 50 years for houses, thus providing greater long-term security.’
In addition, the outlay associated with renewal would be lower, alongside the extra value added as a result of extending the lease no longer needing to be split with the freeholder (marriage value). For many, that could make the whole rigmarole more worthwhile.
‘Purchasing a leasehold property could become more appealing to homebuyers and, in doing so, they could save themselves some money in the process,’ Steve says.
‘A property with 70 to 80 years remaining on the lease could be subject to discounts as high as 15% on average, which equates to £40,000 on the current average UK house price.’
Buyers with a remaining lease term of around 50 years could nab themselves an even bigger bargain, as Steve predicts there could be discounts of up to 25% on market value, which equates to £68,000 off the average home.
But the bottom line is, while it might be tempting to bank on costs being lower in the future, you’ll need to consider the risk in waiting for the law to come through in full. If things don’t go to plan, you could be left hanging – and crucially, burdened with the cost of a leasehold extension.
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