Selling Your Leasehold Property
20th Apr 2021
Selling a leasehold property is simpler than it looks. All it takes is a little extra planning and a few extra documents. The guide will help you understand your lease and how it affects the sale of your home.
Owning a leasehold means that you have a lease to use the property for a certain amount of time, usually several years. Owning the leasehold means that, while the property itself is yours, the ground it stands on and the communal areas of the building belong to the freeholder.
If you are a leaseholder, your does not last forever. When the lease is finished, ownership of the property technically transfers back to the freeholder. However, this rarely happens because you can keep extending the lease. If you have been the leaseholder for two years or more, an extension is your statutory right.
What issues can come up when selling a leasehold property?
Generally, selling a leasehold property does not pose any issues. However, if you have a short lease, generally a lease with 80 years or less, buyers will find it harder to get a mortgage on the property. It will be near impossible to get a mortgage on a leasehold property which has less than 60 years or less left. If your buyer cannot get a mortgage, your sale will fall through, or you would have to find a cash buyer.
Another issue a short lease poses is that a lease with only 80 years or less left will massively impact the sale price of the property. In most cases, a flat that comes with a lease of 99 years or more will be valued at around 99-100% of the price that the freehold reversion (the freeholders interest) would be on the same flat. And, as the lease gets shorter, this relativity will decrease. There are variations on this, but should you be looking at a lease period of around 70 years, the value of the flat will be 91-92%, which would then reduce to 75% on a 50-year lease.
Short leases can also be more difficult and costly to extend. 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.
There are two main ways to make the sale of your property successful if you have a short lease: extend the lease or buy the freehold.
Extending the lease
You can extend your short lease, which will increase the value of your home. The Leasehold Reform, Housing and Urban Development Act 1993 provides a right to all leaseholders who have held the lease for two years or more. Discuss with your solicitor when you should extend your lease.
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 are 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.
The cost of extending the lease varies depending on several factors including, the value of your home, the current lease length, ground rent charges, to name a few. 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 can be quite complicated.
Buying the freehold
The second option is for you to buy the freehold. If there are other leaseholders, then you can club with them and buy the freehold together.
Owning a share of the freehold will attract more buyers as people are usually more interested because they do not have to pay the ground rent and service charges. 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.
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.
Joining with other leaseholders to buy the freehold is called ‘collective enfranchisement’.
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.
At Blocsphere, when you want to sell your property, you will need to order a sales pack from us which can be ordered on our website. Our Property Sale Document packs include all the important documents listed opposite and are unique to each individual property.
Documents include –
- Completed solicitors LPE1 form
- Current Service Charge and/or Ground Rent statement of account
- Current Service Charge annual budget
- Service Charge accounts (3 years)
- Current insurance Certificate(s)
- Copy of any deed of variation in force (if applicable)
- Copy of any additional regulations or “house rules” (if applicable)
- Execution of deed of covenant (if applicable – draft to be supplied)
- Execution of certificate of compliance (if applicable – draft to be supplied)
- Execution of licence to assign (if applicable – draft to be supplied)
- Documentation relating to any forfeiture proceedings (if applicable)
- Copy of current asbestos survey for common parts (if applicable)
- Copy of current fire risk assessment for common parts (if applicable)
- Memorandum and Articles of Association for RMC (if applicable)
- Minutes of last AGM for RMC (if applicable)
- Solicitor correspondence until completion