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.

Lease Extension Process

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.

Valuation

There are 3 methods to valuating the premium

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:

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 If the notice is withdrawn a further section 42 notice cannot be served until a period of 12 months has expired from the date of the original notice.

Freeholder's demands

Once the tenant has served the notice, the freeholder can:

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:

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.

Agreement reached?

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.