When a new flat is sold a lease will be granted for either 99, 125 or occasionally 999 years. In law this only gives the buyer the right to live in the property for this length of time. At the end of the lease the flat goes back to the freeholder.
Technically you do not own the property, you are just a tenant. Initially this is not very important but as the number of years left gradually runs down it will devalue the property. This becomes significant when the unexpired term reaches 80 years.
Until recently any lease with an unexpired term of more than 60 years was acceptable to most buyers and the lenders. However an Act of Parliament reinforced by a legal case (Mundy v The Trustees of the Sloane Stanley Estate) in 2017 effectively moved the goalposts and decided that the cost of extending a lease should be much greater once it reached a remaining term of 80 years. This is due to the fact that at this point in time the “marriage value” became significant. Apparently this is the point when the value of the flat and the freehold is greater if they were owned by the same party, than if owned separately.
This is important when the leaseholder wants to extend the lease and the cost escalates significantly from this point on. Not only is this important when a leaseholder comes to sell his or her property but when a mortgage or re-mortgage is necessary. Since the Mundy case some lenders have increased their requirements, and whereas previously most were satisfied with an unexpired lease term of 55 or 60 years, many are now insisting on at least 80 years unexpired term or even more.
There are two consequences of this:
1) Many leaseholders (probably millions) have flats which they will have difficulty in selling because the buyer cannot get a mortgage unless the lease is extended. Not only is this a problem because of the finance required to extend the lease, but it can take several weeks to arrange an extension and obviously this will delay the conveyancing process, and can result in an aborted transaction.
The cost of a lease extension will usually be thousands of pounds and often tens of thousands of pounds. In many cases the leaseholder will not have this additional finance readily available. If they are selling in order to buy a house they will usually be spending all or most of their savings on the new house and will be unable to proceed if a large chunk of money is unexpectedly needed to extend the lease.
Just to compound matters, this problem does not always arise until well into the conveyancing process when the buyer’s property lawyer has a copy of both the lease and the mortgage offer. At this stage the seller will be planning the move into their new house which may then have to be aborted, and in many cases will also result in the collapse of the chain above, if there is one. This problem can be avoided if the details of the lease length is quoted in the agents details.
See also conveyancing; selling