Buying An Investment Property That Needs a Lease Extension

Over the last few days, I’ve been talking to Joe. He’s buying a property at auction and it needs a lease extension which is fine, but he’s running into a challenge. 

Now, I wanted to share this with you as to be honest, I believe this comes up more than people realise and the information isn’t always readily available.

As I said, Joe is buying this property at auction, so it was known from the start that the property required a lease extension and that’s probably why Joe was able to get it for a good price. 

Now the challenge came when Joe was under the impression that the seller was going to extend the lease and the seller believed that Joe was going to be extending the lease after completion. See the issue here?

So what does all that mean? Well, there are two ways that you could buy this property, and I’ll use an example. 

If you’re going to buy a property that’s £10,000, but it does need a lease extension, and that lease extension is going to cost £10,000, you could either:

  • Buy the property at £90,000 pounds

OR

  • You can buy the property for £100,000 and the seller completes the lease extension. 

The better route here would be to get the seller to complete the lease extension, unless you can negotiate something better on the downside, ignore the lease extension and buy it for even cheaper. 

Regardless of these points; that not how Joe’s sale has gone.

Now, here’s a warning: 

The seller’s solicitor will act in the seller’s best interest and not the buyer’s

Getting close to completion, Joe realized that the lease extension hadn’t been completed, and so did his lawyer, so they pushed for that. And the seller’s lawyer came back to them and said, “Well, no, we’ve applied for the lease extension, “that’s what we’re supposed to be doing.”

So Joe’s lawyer, of course, then had to look into the legal pack from the auctioneer, and the terms and conditions of this purchase and they’ve found that it’s a bit of a grey area, it doesn’t specifically state that the current owner will complete a lease extension prior to completion. 

And so now, they’re arguing that point. This puts Joe in an awful situation because it’s not 100% clear. Joe can pull out of that purchase without penalty, or the seller is obliged to complete that lease extension. 

Now that puts a few more difficulties in place. Obviously, if the completion date for the auction passes, then Joe is going to lose that property. And it might be such a good deal that he doesn’t want to lose that property. 

And why would he want to lose that property? He’s got a great deal! But on the flip side of all of that,

“It’s just a pile of bricks, there’s another pile of bricks down the road”

So what advice can I give?

  1. Make sure the terms are clear

If you’re buying a property that requires a lease extension and you’re buying it as an investment, make sure the terms in the legal pack or in the contract state very clearly that the seller, the current seller will complete a lease extension, if that’s the terms you’ve agreed to verbally. 

  • Seller applies on your behalf

If you can come to some sort of deal in that instance, where you buy the property for a lower amount, but you take on the risk of the lease extension, then you can ask the current seller to apply for the lease extension on your behalf, otherwise you will have to wait two years after the completed purchase before you can apply for the lease extension, and that will cost you more money. 

  • Negotiate the Deal of The Century

The other option is that you just negotiate deal of the century and you say, “No, don’t worry about it, “I’ll take care of everything, leave it with me, “because actually I’m not going to sell this property, “this isn’t a flip, I’m going to keep hold of it.” So I’ll offer you a bit less and I’ll take on all the risk of that lease extension. And I’ll just renew it in two years time when it comes to it, then you might be able to get yourself a better deal, especially if you’re going to rent this property out. 

Now, there’s a couple of catches to that to my final point. That’s the way to get the lowest purchase price, however, I don’t know what the lease length is on that particular deal, but lenders, mortgage lenders, don’t like properties that have less than 80 years on the lease. 

Now there are specialist lenders that will lend on properties that are below 80 years. Maybe you’ll pay slightly more in interest, but depending on the purchase price, it’s not going to make a huge difference to the monthly payments on the mortgage. 

There are deals to be done on properties that need lease extensions as long as you know the risks, as long as you know what possibilities or opportunities there are, and what dangers there are too. 

My overall advice on all of this, Joe, you fight tooth and nail mate, and I’ll help you. 

But if you’re looking at properties that need a lease extension, this is your chance to haggle on the haggle and negotiate, because the seller is going to find a much smaller market to be able to sell too if they’ve got a low lease; remember:

If there’s low demand, the price is low.

So if you can find those property deals that have low demand, because they’re a little bit niche, a little bit special, a bit risky, a bit dangerous, then that’s where you can really haggle hard.