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A guide to the residential lease extension process

Thursday, 17th January 2019 | by: Justin Burns

Leaseholders have the right to extend their leases under the Leasehold Reform, Housing and Urban Development Act 1993.  Under the legislation the owner of a leasehold flat has the right to request a new lease which is 90 years longer than their current lease and at a peppercorn ground rent throughout. In order to qualify flat owners need to have owned their property for at least two years, and the original lease needs to have been for a term of at least 21 years. In return for the grant of the new lease, leaseholders have to pay the freeholder a premium, the size of which depends on the value of the flat, the amount of ground rent reserved under the lease, and the remaining term of the lease.

Hiring professionals

You will need a property solicitor and a valuation surveyor to guide you through the process. The valuer will provide you with advice on the premium payable and can handle negotiations with the freeholder’s valuer on your behalf. The solicitor will deal with serving the required statutory notices, agreeing the content of the new lease, and the associated conveyancing matters. This is a niche area of law and valuation, so make sure the professionals you hire have a strong background in this area of practice.

Valuing the premium

The compensation payable to the freeholder (called a premium) is calculated in accordance with Schedule 6 of the Act. Schedule 6 sets out three potential elements to the premium, which are as follows;

  1. Reduction in the value of the freeholder’s interest in the property arising from the lease extension.
  2. If the lease has an unexpired term of less than 80 years a share of any ‘marriage value’ arising from the lease extension.
  3. Compensation for any reduction in value of any other property owned by the freeholder arising from the lease extension.

In all cases compensation will be payable under element a). Compensation under element c) is very rare, and in practice is almost never payable. Invariably the longer the lease, the lower the premium will be, and in particular lease extensions tend to become much more expensive when the unexpired term drops below 80 years, at which point compensation under element b) becomes payable.

Serving notice

If you have a decent relationship with the freeholder and/or the premium payable is modest it is probably worth attempting to negotiate informally. However, if this isn’t possible, or you aren’t able to agree a satisfactory price, you will need to instruct your solicitor to serve a formal notice on the freeholder under Section 42 of the Act. The notice has to propose a premium, and your valuer will be able to provide guidance in this regard. Typically the proposed premium will be a bit on the low side to leave some room for negotiation. Once notice is served the freeholder may require you to pay a deposit of either £250 or 10% of the premium proposed in the notice (whichever is greater).  The freeholder will usually serve a counter-notice. All being well, the counter notice will admit the leaseholder’s right to claim a new lease, but dispute the proposed premium, and ask for more money.

Agreeing terms

Once the leaseholders notice is served and the freeholder’s counter-notice is received there is a period of up to six months for the parties to agree the terms of the new lease and the premium before the case needs to be referred First-tier Tribunal (Property Chamber) for determination. Your solicitor will liaise with the freeholder’s solicitor to agree the terms of the new lease and the quantum of the freeholder’s recoverable costs, which will include their reasonable legal costs and surveyor’s valuation fee.  Your surveyor will negotiate the premium with the landlord’s surveyor.

Making a Tribunal application

If the terms of acquisition can’t be agreed the case can be referred to the Tribunal for determination. This most commonly occurs where the valuers are unable to agree the premium. Either party may refer the case to the Tribunal two months after the freeholder’s counter-notice is served. If terms remain unagreed and the case is not referred to the Tribunal by six months after the freeholder’s counter-notice is served the claim will expire. Even after the case is referred to Tribunal it remains open to the parties to settle, and most cases are settled well in advance of a hearing.

Completion

After the terms of acquisition are agreed the leaseholder and freeholder have up to two months to exchange contracts. If the freeholder doesn’t play ball you can apply to court, and the court will require the freeholder to comply. Once you complete your solicitor will register the new lease with the Land Registry.

Conclusions

The lease extension process can be complicated, but having a sound professional team can help you avoid the pitfalls and beartraps and make the process as hassle free as possible. We have a team of Chartered Surveyors that specialise in lease extensions, handling hundreds of cases every year, and having close links with solicitors specialising in this area of practice. You can contact the team on 020 8546 7211 or by email.