Hello everyone, first post here so apologies if any of this has been covered elsewhere. My wife and I are first-time buyers currently renting in Surrey. We have been looking at flats in our area for the last few months and have found one we both really like, a two bedroom purpose-built flat in a small block of six. The asking price is £265,000 which is within our budget.
The issue is the lease. It currently has 72 years remaining which I understand is getting into the territory where mortgage lenders start to get nervous (i.e. some requiring 80+ years at the point of offer). The seller has told the agent that a lease extension is “in progress” but could not give a timeline or confirm whether it has been agreed with the freeholder yet. My concern is whether we should be relying on that claim or whether we need to see evidence before even making an offer.
The other question is about the service charges. The agent sent over the most recent annual statement which shows the total charge as £2,400 per year, but there is no breakdown of what that covers and no mention of a reserve or sinking fund. My wife and I are trying to work out whether that is reasonable for a block of six flats with communal gardens and a shared car park. We have no frame of reference.
So my questions are:
- Should we insist on seeing proof that the lease extension is genuinely underway before we make an offer, or is that something our solicitor would deal with after the offer is accepted?
- Is £2,400 per year a reasonable service charge for this type of block, and should the absence of a sinking fund be a red flag?
- If the lease extension has not actually been started, is it realistic to expect the seller to complete it before exchange, or would we be looking at negotiating a price reduction to reflect the short lease?
Thanks
72 years is a problem. Many lenders will not touch anything below 80 years unexpired at the point of application, and even those that will may load the rate or restrict the LTV. Do not proceed on the basis of a verbal assurance from the seller that an extension is “in progress” because that could mean anything from a formal Section 42 notice having been served to the seller having mentioned it to the freeholder in passing six months ago. Your solicitor should request evidence of what stage the extension is at before you commit to any costs. If no formal notice has been served then the extension has not started in any meaningful sense.
On the service charge, £2,400 per year for a block of six with communal gardens and parking is not outrageous but the absence of a sinking fund is a concern. That means any major works, roof, windows, communal boiler, will be demanded as a one-off levy with little notice. Ask for three years of accounts, not just the most recent statement.
Stef, Grumpy has covered the lending side well so I will not repeat it.. One thing to be very aware of at 72 years is marriage value. Under the current law (the Leasehold Reform Act 1993), once a lease drops below 80 years the cost of extending it jumps significantly because the freeholder is entitled to a share of the marriage value.. basically the difference between the value of the flat with a short lease and the value with a long one. At 72 years that premium could be substantial, and crucially it is the leaseholder (i.e. the seller, or you if you buy first) who pays it.
I had a sale fall through in 2019 on a flat in Newcastle for exactly this reason. Buyer’s solicitor flagged the 74 year lease, buyer asked the seller to extend before exchange, seller got a quote from the freeholder of £18k and pulled out of the sale entirely.. Wot a mess..
My advice would be to ask the agent for documentary evidence of the extension before you spend money on a solicitor or surveyor. If they cannot produce a copy of a Section 42 notice or correspondence with the freeholder, assume nothing has happened.
Cheers!
Thanks @GrumpyLandlord47 and @theartfulfreeholder, both really helpful and honestly a bit sobering. The marriage value point is one I had not fully appreciated, I knew the cost went up below 80 years but had not realised just how steep the jump can be.
One thing I am trying to work out is the best approach strategically. We have two options as I see it. Option A: negotiate a lease extension as a condition of the purchase, i.e. we make our offer contingent on the freeholder agreeing to extend before completion. Option B: buy at a reduced price that accounts for the short lease and then pursue the extension ourselves after we have been in the property for two years (which I believe is the qualifying period under the current Act).
Option A feels cleaner but I am not sure how realistic it is, the vendor may not want the hassle or delay. Option B means we are taking on the risk that the cost of extension goes up in the meantime, and presumably our mortgage options are more limited until the lease is extended.
Is there a third option I am missing? And does anyone know whether the Leasehold Reform Bill that was going through Parliament changes the two year qualifying period? I have seen conflicting things online about that.
Stef, Option A every time if you can make it work.. The reason is simple. At 72 years you are already in marriage value territory and that clock is ticking against you. Every year that passes before you extend costs you more, not less. Waiting two years to qualify under the current Act means the lease is down to 70 years at best and the premium will be higher.
On the Leasehold and Freehold Reform Act 2024, yes it received Royal Assent but the key provisions (including abolishing the two year qualifying period and reforming the premium calculation to remove marriage value) have NOT yet been brought into force.. The government has been consulting on the valuation methodology but there is no confirmed commencement date. I would not buy a short lease flat on the assumption that a future law change will save you money. That is speculation, not planning.
The third option you might be missing is getting the vendor to serve a Section 42 notice before completion and then having that notice assigned to you as part of the sale. This locks in the current premium calculation and starts the statutory process. Not all vendors will agree to this but it is worth asking.. Your solicitor should be able to advise on the mechanics.
Cheers!
Thanks @theartfulfreeholder, that is a very clear way of framing it. One thing I am still uncertain about is whether we should go the statutory route or try an informal negotiation with the freeholder. The estate agent mentioned that the freeholder is a private individual (not a large company) and has apparently been “reasonable” in the past when other leaseholders in the building have extended. My concern is that informal negotiations have no real framework and the freeholder could ask for whatever they like, whereas the statutory route at least gives us a right to a 90 year extension at a price determined by a formula.
On the other hand, the statutory route requires us to have owned the flat for two years before we can serve notice, which means we would be sitting at 72 years (or less, depending on how long the purchase takes) for two years before we could even start. That feels risky. Is there any way to negotiate informally and then fall back on the statutory route if it does not work out, or does starting one preclude the other?
Stef, good news.. you can absolutely do both. Starting informal negotiations does not preclude the statutory route later. Many buyers negotiate an informal extension as part of the purchase (sometimes the seller serves the s42 notice before completion and assigns it to the buyer, which gets around the two year ownership requirement).
Ask your solicitor whether the current leaseholder would be willing to serve a s42 notice and then assign the benefit to you on completion.. This is common practice and means you get the statutory framework and the right to a 90 year extension from day one without waiting two years. The freeholder cannot refuse it. The only cost is the premium determined by the valuation.
On the “reasonable” freeholder point.. be cautious. Estate agents say this about every freeholder because it makes the flat easier to sell. I have dealt with freeholders who were described as reasonable right up until the moment money was on the table.. Cheers!