The January sales seem to have come early to central London, with many flats in the capital's most elegant squares on sale for 10-20 per cent less than they were just two months ago. But there is a hitch.
The flats have unusually short leases, and now, thanks to a controversial court ruling that has shocked the London property world, it has suddenly become much more expensive to increase the duration of a lease.
London's short-lease system works like this: most leasehold properties, such as flats, have leases for at least 99 years, but some of those in period buildings, built on the estates of the aristocrats who used to own large parts of central London, have run down their leases to 20 years or less. When these London estates (Portman, Grosvenor and Cadogan, for example) sell short-lease properties, they have always gone on sale at sub-market prices, sometimes for as little as 50 per cent of their market value.
Someone who bought such a flat and then lived in it for six months or more was entitled to negotiate a lease extension from the freeholder, or could buy the freehold itself. The cost of either would depend on the freeholder's willingness to sell, how much the longer lease would add to the flat's sale price (called "marriage value"), plus compensation worked out by complicated formulae involving actuarial tables and a "discount rate" based on the prevailing interest rate.
The combined costs of purchase and lease extension were usually well under the market price of a similar flat with a 99- or 125-year lease, so the buyer could make a profit if he or she then re-sold.
There were occasional complications. For example, some buyers found it difficult to get a mortgage on a flat with a lease below 50 years because of a risk that its value could fall further if it proved impossible to negotiate an extension. Also, lease-extension negotiations could drag on for years, leading to legal costs if the buyer took the freeholder to leasehold valuation tribunal.
But in most cases, the system worked well. However, a tribunal ruling in September on four homes on the Cadogan Estate in Chelsea changed the calculation of the discount rate. It will now cost substantially more to extend the leases or buy freeholds outright on the four properties involved in the case.
If this new rate is adopted by other estates, as property consultants predict, it will add tens, even hundreds of thousands of pounds to the cost of every lease extension. Therefore, to make short-lease homes attractive to buyers once again, agents calculate that they may have to slash asking prices by up to 20 per cent.
"This decision represents a seismic shift in valuing lease extensions and acquiring the freehold," says James Wyatt of John D Wood. Angus Fanshawe, of Douglas & Gordon, a central-London estate agent, adds: "This is likely to have a knock-on effect of lowering the value of flats on medium- or short-term leases." He says that his firm has already lost one short-lease sale because the would-be buyer was deterred by the likely cost of extension.
Another London agent, Beaney Pearce, says that a property that it was selling would have cost £700,000 for a lease extension before the judgment. Now, the process will cost £800,000, so the firm is reassessing the asking price.
All this is unhelpful to a central-London housing market that was picking up after three years in the doldrums. Nor is the problem an isolated one - Douglas & Gordon estimates that a fifth of the properties in Kensington & Chelsea have leases of 25 years or less.
Some experts say that individual buyers must negotiate hard in the light of the ruling. "Ensure that the amount of years left on the lease is reflected in the selling price - we won't buy a property with a 10-year lease if it's priced as if it had a 20-year lease," says Alex Michelin of Finchatton, a development firm that specialises in buying short-lease property on which it negotiates an extension before modernising and reselling.
This uncertainty casts doubt over the sales of many short-lease properties. With some of the most sough- after addresses in London, they would previously have been an almost-certain bargain. A two-bed flat in Cadogan Square, for example, with a 17-year lease is on sale for £750,000 (Douglas & Gordon, 020-7225 1225) when it would be £1.25m with a 99-year lease.
At Eaton Place, there is a two-bedroom maisonette with only five and a half years left on its lease. It is now on sale for £675,000, and as its lease is so short, a successful renegotiation would dramatically increase the property's value by at least another £1m, according to the selling agent Kinleigh, Folkard & Hayward (020-7228 2666). And in Flood Street in Chelsea, there is an unusual three-storey town house - with its own bomb-shelter - on sale for £1.575m (Winkworth, 020-7589 6616). It has only a 30-year lease, but with a lease of 80 years or more, it would cost about £2.25m.
Each of these may well still represent a bargain, but the devil is in the detail. Estate agents advise that any potential buyer must first establish whether it would be possible to get an extension to the lease and, second, get an estimate of how much it would cost. Angus Fanshawe of Douglas & Gordon says that a good agent would always have advised a buyer to do this, even before September's judgment. Now, he says, "making this enquiry has become much more important".