A freeholders guide to residential lease extension
The Leasehold Reform, Housing and Urban Development Act 1993 gives the leaseholder – also known as the tenant or lessee – the right to extend their lease by a further 90 years, without a ground rent.
The freeholder is legally obligated to comply with this request, depending on three criteria:
- The property must be a flat
- The leaseholder has owned their flat for at least 2 years
- The lease has an original term of at least 21 years
Lease extension can seem like a complex process, so ensuring you have the right legal and valuation advice is imperative. To give you a better understanding of what is involved, we’ve included the answers to some of the most commonly asked questions from landlords below.
What are my responsibilities as a landlord?
The leaseholder should initiate negotiations with the freeholder once their surveyor has valued the property and calculated the likely premium. This can be done informally to start – however if no progress is made, then the leaseholder can issue a Section 42 Notice.
The freeholder then responds with a Counter Notice which will include their counter premium proposal. This must be served within 2 months of the date of the Section 42 Notice. Negotiations will then begin between the surveyors of the two parties. If the surveyors of the two parties are unable to agree on a premium, then either party can apply to the First-tier Tribunal to have the matter settled by an independent body. This can be done within 6 months from when the freeholder’s Counter Notice was due.
Can I challenge a lease extension?
A lease extension can be challenged. However, if an agreement of terms is not finalised by the surveyors of both parties, the issue can be taken to a First-tier Tribunal to have the matter settled by an independent body
Who is liable for the fees involved?
If the leaseholder begins the formal statutory lease extension process by issuing a Section 42 Notice, then they are responsible for costs incurred by the freeholder during the claims process. This will include:
- The freeholder’s valuation of the property
- The legal costs of drawing up a new lease
- Any costs from the original claim of the lease extension.
- The premium payable to extend a leasehold
The leaseholder will not pay for any legal costs for negotiating the price. If the leaseholder and the freeholder enter informal negotiations regarding a leasehold extension, each party is liable for their own individual costs incurred, but the payment of the freeholder’s costs may form part of these negotiations. If the surveyors of the two parties cannot agree on a premium and the claim is taken to a First-tier Tribunal, each party will be liable for their own costs.
Am I entitled to charge a free for varying the lease?
If a leaseholder enters statutory proceedings the freeholder does not have the right to charge a fee, as the leaseholder has a legal right to extend their leasehold. However, leaseholders are obliged to pay the landlord a premium for the lease extension – which will be determined by specialist surveyors of both parties – as well as paying any reasonable costs incurred by the freeholder.
Do I have to negotiate using formal Notices?
If the leaseholder and freeholder initiate negotiations, the freeholder can put forward their own lease terms before the Section 42 Notice has been issued. This may include charging the leaseholder fees for requesting a lease extension. However, the freeholder is under no obligation to enter informal negotiations and may offer a new lease on different terms – for example, a lease term of less than the 90-year extension provided by statute or at an increased ground rent. If terms cannot be agreed on through informal negotiations, the leaseholder does not have recourse to the First-tier Tribunal and must therefore commence the formal statutory process.
What are my rights as a landlord?
Once the Section 42 Notice has been served, the freeholder has the right to request evidence of the leaseholder’s title to the flat and their period of ownership. If this is not supplied by the leaseholder within 21 days then the Notice of Claim can be withdrawn, and the leaseholder must pay any “reasonable” costs and valuation fees incurred by the freeholder.
Freeholders can appoint their own specialist chartered surveyor to inspect the leaseholder’s flat for valuation and calculate the likely premium. At this stage, the freeholder requests a 10% deposit of the initial offer price set out in the Notice of Claim from the leaseholder, payable to the freeholder within 14 days of the request being made.Even after an application for a lease extension has been submitted, the freeholder still maintains the right to sell their freehold. This will subject the new purchaser to any existing applications for a lease extension, if they have registered their Notice of Claim with the Land Registry.
This means any application for a lease extension will continue as though the new owner had originally received the Section 42 Notice. If a freeholder owns a property with a lease of less than 5 years from the service date of the notice, then they can claim the right of redevelopment against the leaseholder’s request for an extension. In this circumstance, the landlord has to prove indefinitely that he intends to demolish and redevelop the building, therefore voiding the leaseholder’s extension claim.
In addition to this, the landlord has the right to repossess the flat for purposes of redevelopment, once the existing lease has reached the end of its term. This right is subject to an application to the courts as well as compensating the existing leaseholder for the full value of the 90 years that remains on the lease.
Does the leaseholder have the right to extend the lease?
Under the Leasehold Reform Housing & Urban Development Act 1993 and the Commonhold & Leasehold Reform Act, a leaseholder legally qualifies to extend their lease, provided the below qualifications are met: The property is a flat The leaseholder has owned the property for at least 2 years The lease has an original term of at least 21 years As long as the leaseholder requesting a leasehold extension meets the above criteria, they have the legal right to proceed with initiating negotiations.
If the leaseholder and freeholder initiate negotiations, before issuing the Section 42 Notice, the freeholder can put forward their own lease terms, which may include charging the leaseholder fees for requesting a lease extension. The landlord is however under no obligation to enter into informal negotiations and may offer a new lease on different terms; such as a lease term of less than the 90 year extension provided by statute or at an increased ground rent. The landlord is under no obligation to enter into informal negotiations and if terms cannot be agreed on this basis the leaseholder does not have recourse to the Tribunal and must therefore commence the formal statutory process.
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