The Lease Extension Process
The path to extending the term of your leasehold interest can be a long one; on average it takes 11 months from start to finish. The earlier you start the lease extension process, the cheaper the overall costs will be, as remember - as the time passes, so does the diminution in value of your leasehold interest.
Are you eligible?
You must meet the following criteria to be eligible:
- Owned the leasehold property for 2 years or more, and
- The term of the original lease must be in excess of 21 years
However the following criteria will exclude your eligibility:
- The freeholder is a registered charitable housing trust, or
- The lease is commercial in nature, not residential.
There are 3 methods to valuating the premium
- Best option - instruct a professional
A regular estate agency will not have the skills and experience to be able to accurately determine the estimated cost of extending your lease. We strongly adsvise that you obtain a full calculations report breaking down how the premium is calculated, step by step. You can either choose a lease extension surveyor, or otherwise find a law firm that deals with both the valuation and legal aspects - quite often this is the most financially and time efficient method. The lease extension valuation process follows a strict algorithm taking into account recent case law changes. A suggestion is Ashley Connell at Hetts - Lease Extension Solicitors. This firm is a member of ALEP (Association of Leasehold Enfranchisement Practitioners) with a wealth of experience in this area since 1993.
- Use an online calculator / estimator
It is possible to determine the premium, to a close level of accuracy, using our online calculator. This is provided that you are able to guess the value of your property, which most leaseholders are able to do through researching sold prices of similar properties in the local vicinity. Although you will be able to obtain a close estimate of the premium, an online calculator isn't recommended when relying on serving a notice on the landlord; this is because if there is a disagreement the courts may ask you to supply a copy of your professional surveyor's report / valuation. Online calculators also don't take into account rising ground rent reviews.
- Download Land Registry documentation to check what other leaseholders have paid to extend their lease with the same freeholder.
For Land Registry account holders, in most cases it is possible to download Lease Extension Deeds where leaseholders and freeholders within the same building have already extended their lease. Do remember that the premiums previously agreed will not be binding on the freeholder for future deals and they are likely to differ from your calculations due to differences in remaining lease term length at the time of the extension. Despite that, they may provide you with a good indication.
Serving notice on the freeholder
You do not need to serve a notice on the freeholder if you have already come to an agreement on the price to be paid, some people prefer this method to save time; it's called the 'informal route'. If this is not the case then try to attempt to agree the premium first to save time and legal fees.
The notice is called a "Section 42 Notice" - governed by s.42 of the Leasehold Reform, Housing and Urban Development Act 1993 "the Act".
The notice must be served on the correct individuals, including the landlord and any other party with an interest in the lease, such as a management company.
It must include:
- The leaseholder(s) full name(s).
- The address of the leasehold property and correspondence address, if different.
- Particulars of the lease, such as the date it was granted and original parties.
- The proposed premium (we recommend making an offer on the low side to allow room for the negotiation stage).
- Number of years increase (normally an additional 90 years).
- Any proposed changes to the ground rent.
- Provide the freeholder with a deadline to submit a counter notice of no less than 2 months from the date of the notice.
We strongly recommend that you instruct a solicitor to submit the notice as any errors could prove costly further into the process. If the notice is withdrawn a further section 42 notice cannot be served until a period of 12 months has expired from the date of the original notice.
Once the tenant has served the notice, the freeholder can:
- Under s.44 of the Act request access for the purposes of carrying out a valuation with at least 3 days notice. If the property is rented, you will need to discuss this with your tenants to ensure access can be provided on time.
- Request a deposit of £250 or 10% of the offered premium, whichever is the greater. This must be paid within 14 days. It is good practice to have this money readily available or even send it to your solicitor upon service of the s.42 notice as to avoid any late payment.
- The freeholder can also request all service charges and ground rent is paid up to date, however this demand can only be made prior to completion of the lease extension notice.
Freeholder serves a counter-notice
The freeholder must serve the counter-notice within the timescale set by the tenant in the s.42 notice, which is usually 2 months after the date of the s.42 notice. The freeholder has the following options available:
- Admit that the tenant has a right to a new lease.
- Deny the tenant has a right to a new lease. For example the leaseholder is not eligible (see above).
- Either of the above however state the the freeholder intends to make an application for an order under s.47(1) of the Act on the grounds that he/she intends to redevelop the premises in which the leasehold property is contained. The freeholder must have clear plans and make an application through the courts if the right to renew is denied.
Negotiation takes place
It is likely that there will be a monetary difference between the premium offered by the leaseholder within the s.42 notice and the counter-offer made by the freeholder. Usually the counter-offer is far higher than the leaseholder's original offer. The two offers can sometimes vary widely. It is advisable to ask the freeholder for a copy of their valuation report to determine if their offer is based on evidence or if the they are trying to obtain an unreasonably high price at the leaseholder's expense.
There is a statutory negotiation period of at least two months but less than six months. This means that the leaseholder cannot apply to the courts for a lease renewal until at least two months has passed since the date at which the s.45 counter notice should have been received, however the application must be made within six months of the s.45 counter-notice. The surveyor's of both the leaseholder and freeholder are normally instructed to carry out these negotiations.
Most parties are able to reach an agreement during the negotiation stage, the minority of cases reach the courts.
If the parties are able to reach an agreement, their solicitors will be re-instructed to draft the paperwork and agree on the wording of the lease renewal deed, which eventually all parties will sign.
The leaseholder's solicitor will be asked to provide a legal undertaking (a promise) to pay the freeholder's legal fees at the outset. To enable this, the leaseholder will be asked to pay the expected freeholder's legal and surveyor's costs into their own solicitor's bank account, which will be held there until completion.
The lease renewal deed (and a mortgage deed of substitution, if the leasehold is mortgaged) will be signed by all parties to the lease, the premium and freeholder's legal fees are paid to their solicitor.
The leaseholder's solicitor makes an application to the Land Registry to register the new lease. The Land Registry take on average 12-16 weeks to complete this, however it can be expedited if the leaseholder can provide evidence of a sale or remortgage.
Leaseholder's application to the tribunal
If an agreement cannot be reached, the leaseholder will have no further options available with the exception of making an application to the court.
Provided a minimum time period of two months has passed since the freeholder's counter notice, either party can apply to the First Tier Tribunal (Property Chamber) or the Leasehold Valuation Tribunal (in Wales) to determine the premium of extending the lease by a further 90 years. It is important to note that if you have not agreed terms, or applied to the Tribunal, within 6 months of the date of the counter notice, you will be deemed to have withdrawn your notice. You would then have to wait a further 12 months before you can serve another section 42. notice.