
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 breathing space 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.
[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