When you buy an apartment in England or Wales, what you usually get is a lease for the property, this essentially means you own (or legally speaking, have exclusive access rights) for a specific number of years to that property.
Leases are usually created for a number of years such as 99 years, 999 years or 125 years.
As leases get closer to their expiry date, the owner ( leaseholder) should consider whether they wish to extend this lease to retain their possession of the property. As the lease term decreases, the value of the property also decreases and the cost of increasing the lease length increases. Also mortgage lenders invariably have criteria where they insist on a certain minimum number of years left on the lease.
There are two ways to extend a lease and this article provides the key points to consider;
Option 1: The Legal Route
This is often the leaseholder’s preferred option and is often referred to as a Statutory Lease Extension.
What is the relevant law?
The Leasehold Reform Housing and Urban Development Act 1993, as amended by the Commonhold and Leasehold Reform Act 2002.
What happens?
Serving a notice under the Section 42 of the 1993 Act will get you an additional 90 years, at a peppercorn ground rent (£ zero). The extra 90 years is added to the original term – so a 125 year lease becomes a 215 year lease, from the original commencement date. The ‘new lease’ usually has the same clauses and terms as the original lease. However, there is limited scope to make variations; for example to remedy a defect in the original wording.
How to qualify?
1. The leaseholder must have a long lease which was originally granted for a term in excess of 21 years.
2. The leaseholder must have owned the flat (owned the lease) for at least two years. Therefore they must be legally registered as the proprietor at HM Land Registry for at least two years prior to serving the Section 42 Notice. There is no need to be resident in the flat, so landlords will qualify.
Are there exceptions?
Yes;
1. A leaseholder will not qualify for a statutory lease extension if they have a business or commercial lease; for example a lease of a shop or office space.
2. A freeholder is exempt from being required to provide a statutory lease extension if they are a charitable housing trust and the flat is provided as part of its charitable functions.
How do I do it?
1. The leaseholder obtains valuation advice on the cost of the extension – a figure for the ‘lease extension premium’ – to insert in the Section 42 Notice. It is advisable to instruct a specialist leasehold valuer to inspect and prepare a report, although sometimes this can be a ‘desktop valuation’ with no inspection of the property. It is a good idea to do this first to see if the extension is financially viable; i.e. is it affordable?
2. The solicitor then serves the Section 42 Notice on the Freeholder (often referred to as the Landlord). This gives the Landlord ‘at least two months’ to respond with a counter-notice. The Section 42 Notice must specify the date for response. It is advisable to instruct a competent and experienced specialist leasehold solicitor to do this for you.
3. If a landlord denies the leaseholder’s right to the extension; for example because a leaseholder does not qualify; the landlord must seek a declaration from the County Court. This is why it is important to seek specialist legal advice to help avoid this sort of error.
4. If a landlord challenges the validity of the Section 42 Notice, the leaseholder can apply to the County Court for an official declaration. If the court agrees, the leaseholder can re-serve the notice.
5. Usually, a landlord’s counter-notice will accept the right, but object to the premium offered; if so, parties can negotiate for up to 2 months. If an agreement on the terms cannot be reached, parties have a further 4 months’ window to apply to the First-tier Tribunal (the FTT) to determine terms which cannot be agreed. Parties can still negotiate during this window and withdraw from the FTT process if an agreement is reached.
6. Once parties agree terms or the FTT makes a decision (and the right to appeal it has surpassed) on those terms, the new the lease must be completed within 2 months from that date. If not, the parties have a further 2 month window to complete or to apply to the County Court to enforce completion. That is quite rare thankfully.
Who signs the Section 42 Notice?
The leaseholder can personally sign it or provide express authority for their solicitor or agent to sign it. It is best for the leaseholder to provide this authority in writing.
What about purchasing a property with a short lease?
The 1993 Act can still help you. Usually, you can ask the seller if they qualify to serve a Section 42 Notice. The benefit of the Section 42 Notice can then be assigned to the buyer upon completion of the purchase. This saves the buyer from having to wait until they have been the registered owner for 2 years. In practice, the seller’s solicitor will normally ask the buyer’s solicitor to do the leg work and prepare the Section 42 Notice and carry out any associated legal work. The assignment is usually effected with a separate notice of assignment to be signed by the buyer and seller, along with references in the sale contract. The Section 42 Notice is then normally served immediately following the exchange of contracts.
How much will the lease extension cost?
A specialist leasehold valuer will be able to advise on this. However, initially, you will need to consider a concept known as ‘marriage value’. This forms part of the valuation formula and is part of the premium payable. It reflects the potential increase in the value of the flat as a result of the lease extension.
Marriage value can be a contentious point, as 50% of this sum is payable to the landlord as part of the lease extension premium. However, where there are more than 80 years unexpired … i.e. more than 80 years remaining of the original lease term … at the date the Section 42 Notice is served – marriage value is not payable. It is therefore financially vital for leaseholders to serve a Section 42 Notice before the 80 year mark.
Note: Leasehold reform proposals might remove marriage value from a statutory lease extension … at some point in the future.
Please note when you serve a Section 42 Notice the valuation date is fixed as the date the Section 42 Notice was served. Therefore, even if negotiations go on for a while, the lease extension premium will be calculated on the value of the flat on the date of service.
What if I have a mortgage?
If you follow the statutory lease extension route under the 1993 Act you do not need to obtain lender consent to the extension. It is deemed to have been given.
You just need to ensure your solicitor updates the mortgage company at the end of the process.
What about solicitor and valuer fees?
The leaseholder is liable to pay the landlord’s “reasonable” legal and surveyor costs in relation to the statutory lease extension. Although each party bears their own valuer negotiation fees and any fees incurred in connection with the FTT.
The leaseholder is able to make an application to the FTT to have these costs determined if they are thought to be unreasonable. The key test is, would the landlord have incurred the same costs had they been personally liable?
What if I am a landlord and I receive a Section 42 Notice?
Get specialist leasehold legal advice to advise you on your position.
You must respond to the Section 42 Notice with a counter-notice by the deadline specified. If you fail to respond with a valid counter-notice, or you serve late, the leaseholder can apply to Court to acquire the lease extension on the terms of their Section 42 Notice. Crucially this includes the premium they propose, which will be at the lower end of the range provided by their valuer. If you think the Section 42 Notice is not valid, a freeholder can challenge it.
Option 2: The Informal Route
What is the informal route?
This is the option of trying to enter into a voluntary agreement with your freeholder/ landlord. There is no right to it. Any terms can be agreed upon. Although if a new lease is granted the landlord will not be able to charge any ground rent subsequently. The Leasehold Reform (Ground Rent) Act 2002 came into force on the 30th of June 2022, which essentially required any new residential lease (granted on or after this date, for a term in excess of 21 years) to be a peppercorn rent (£zero).
Please seek specialist leasehold advice on this, as there is the possibility for the deal to be drafted in a way to allow the landlord to recover the existing rent on the remainder of the existing lease term.
Why would I choose this informal route?
If you decide an additional 90 years is too expensive or you are trying to sell – a shorter lease extension might do. Such a shorter lease extension will often be cheaper; i.e. it will cost a smaller premium and it can also sometimes be a quicker option.
However, there is no legal right to obtain this and the landlord can simply refuse or ignore informal requests. Moreover, there is no right to negotiate the premium and the landlord may try to vary the lease terms.
What if I have a mortgage?
Under a voluntary or informal arrangement, you will need to obtain your lender’s consent to the lease extension. They may charge an administration fee for dealing with this. Generally, the lender will consent providing there is no adverse effect on their security. An extended lease is generally better security for the mortgage company.
This guide covers a brief overview of the statutory lease extension basics only and for detailed and specific advice, we strongly recommend seeking specialist leasehold legal advice from the appropriate professional.
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