We make a point of highlighting that we may be able to work with short leases, but why does this need to be highlighted at all? Well, properties with short leases can present a double-edged sword.
Many high street lenders won’t lend on properties with short leases as their values tend to diminish rapidly as the lease term ends. But, a “short lease discount” may be available to investors willing to take on the risk, and secure a bargain.
It is possible to extend a lease, but it can be difficult when it’s relatively short. As such, specialist loans that can allow property investors to secure a >30-year leasehold opportunity are key.
There are typically two options available to bespoke borrowers engaging with strategies involving lease extensions. They can “informally” extend the lease after a purchase, which involves negotiating directly with the freeholder. To get the initial purchase out of the way, an acquisition bridging loan can be utilised, such as a residential, or large tailored loan.
Or, a lease extension can be done “statutorily”, which is the formal process. So long as certain conditions are met[1], leaseholders have the right to claim a new lease for a term of 90 years longer than the existing lease at a premium, and at a peppercorn rent. For this, a Bridge Fusion loan may be of use as it can provide additional time for organising a lease extension.
It can be challenging to support property investors with short-leases, but we may consider these deals where certain evidence is present. If we had official documentation confirming the lease was to be extended upon completion, we could potentially find a way forward.
Examples may include paperwork from the borrower’s solicitors showing that the lease would be extended within a short-period after our loan, and/or seeing evidence of the borrower having funds available to extend the lease.
Generally, once a lease is extended, the property becomes mortgageable, which typically increases its value. As such, owners can then look to refinance with a high-street lender for the exit strategy, or sell the property at a higher price to cover the loan.
Working on a similar case?
Where a short lease is limiting mainstream options on an investment, an early sense-check can help explore specialist finance solutions.
FAQs
What is considered a “short” lease?
Generally, a lease is considered short when it drops below 80 years. Short leases can create issues as they get more expensive to extend, and lenders become hesitant to work with them. Although, looming reform will soon allow leaseholders to get the right to switch to commonhold, and new leasehold flats will be banned.
What is a peppercorn rent?
A peppercorn rent is a nominal or token payment that is more symbolic than anything else. It’s not intended to generate income for the landlord involved, but is instead used to fulfil legal requirements to complete a lease agreement. A peppercorn rent can be as low as £1.
What is the difference between leasehold and freehold?
In the simplest terms, freehold means to own a property, including the land it’s built on, with no fixed time limit involved. With leasehold, the property is owned for a fixed amount of time. The property is leased from a freeholder. Flats are typically leasehold assets.
[1] https://england.shelter.org.uk/professional_resources/legal/home_ownership/leasehold_and_commonhold/rights_of_leaseholders_of_flats_to_extend_leases#:~:text=The%20right%20to%20extend%20the%20lease%20gives%20leaseholders%20the%20right,of%20that%20trust’s%20charitable%20aims
