Buying a short lease to extend: the arbitrage explained
A short lease is the most reliably mispriced discount in the market, and the price of extending it is knowable before you buy.
A flat with a short lease trades at a discount to an identical flat with a long lease, and the discount is frequently larger than the cost of extending. The gap exists because extending is uncertain to a buyer who has not done the work, and because most buyers need a mortgage that the short lease prevents.
The arbitrage is to buy at the short-lease price, extend, and own a long-lease flat. Whether it works depends on establishing the extension cost and the long-lease value before you buy, not after.
Establishing the extension cost
The statutory route under the Leasehold Reform, Housing and Urban Development Act 1993 gives a qualifying leaseholder the right to extend by 90 years at a price determined by a formula, with the First-tier Tribunal to settle disputes.
- Ground rent capitalised over the remaining term — the smaller component
- Marriage value, which applies only where the lease has under 80 years unexpired, and which is the difference between the short-lease value and the long-lease value, split 50/50
- The freeholder's reasonable costs, including their valuation and legal fees
- The leaseholder's own valuation and legal costs
- The two-year ownership requirement for the statutory route, which may force an informal negotiation
The risks
The arithmetic is straightforward; the risks are in the assumptions.
- The freeholder may be unidentifiable, absent or insolvent, which makes extension far harder
- The freeholder may dispute the valuation, which means the tribunal and further delay and cost
- The lease may contain restrictions on alterations, subletting or use that affect the flat's value independently
- The building may have defects or a large planned works programme that adds to the service charge
- The long-lease value you assumed may not be achievable if the market has moved
Making it work
The discipline is to obtain a specialist lease extension valuation before exchange, and to confirm that the leaseholder will qualify for the statutory route or that the freeholder will negotiate informally.
The comparison is: purchase price, plus extension premium, plus both sides' costs, plus the time, against the value of an equivalent long-lease flat. Where the total is meaningfully below that value, there is a genuine margin. Where it is close, the risks are not adequately compensated and the property is not the bargain it appeared.
Common questions
- Can I make money buying a short lease flat and extending it?
- Sometimes. The discount on a short lease is often larger than the cost of extending, particularly where the lease is under 80 years and most buyers are excluded by mortgage criteria. Whether it works depends on obtaining a specialist valuation of the extension cost before buying, and on the freeholder being identifiable and cooperative.
- How much does it cost to extend a lease?
- It depends on the lease length, the ground rent and the flat's value. The price has two components: the capitalised ground rent, and marriage value where the lease has under 80 years remaining. Add both sides' professional costs. Marriage value is the larger element and it is why extending below 80 years is so much more expensive.