Under the Leasehold Reform, Housing and Urban Development Act 1993 (as amended) leaseholders have the right to claim a new lease with an additional term of 90 years and a peppercorn ground rent throughout. In return the leaseholder will have to pay the freeholder compensation in the form of a premium, and will also be responsible for some of the costs incurred by the freeholder in dealing with the claim.
The processes commences with the leaseholder serving a formal notice of claim on the freeholder under Section 42 of the Act (called a ‘Section 42 notice’). The notice will include a proposed premium. Typically, the proposed premium will be less than the leaseholder expects to pay, leaving some room for negotiation. The notice will also specify a deadline for response, which must be at least 2 months after the date of the notice. In almost all cases the freeholder will want to serve a counter-notice proposing a higher premium. It’s important to address receipt of the notice in a timely manner, and to serve the counter-notice before the deadline, as otherwise the leaseholder may be able to enforce the terms of their notice (including the proposed premium) in court, which would likely result in you receiving a smaller premium that you are entitled to.
This is a complicated area of law and valuation. You will need a specialist valuer and solicitor to help you through the process. Your solicitor will review the leaseholder’s notice, draft and serve the required counter-notice, agree the terms of the new lease with leaseholder’s solicitor and handle the conveyance of the new lease. Your valuer will provide you with guidance on the premium and can also be called upon to negotiate the premium on your behalf.
You will be entitled to recover your solicitor’s reasonable fees and your valuer’s valuation fee from the leaseholder. On receipt of the Section 42 notice your solicitor can require the leaseholder to pay a deposit of 10% of the premium proposed in the leaseholder’s notice, which can provide with some protection against the risk of abortive costs and help with cash flow.
The premium is determined in accordance with Schedule 6 of the Act. Under Schedule 6 there are three elements to the premium;
- The diminution in the value of the freeholder’s interest.
- Where the lease has less than 80 years left to run, 50% of marriage value.
- Compensation for diminution in the value of any other property owned by the freeholder.
While valuation is far from an exact science your valuer should be able to give you an estimate of the premium payable, alongside best and worst case scenarios. Your valuer will also suggest an appropriate premium proposal or the counter notice, which will need to be at the higher end of the scale, again to leave some room for negotiation.
Agreeing the terms
Once the counter-notice is served your solicitor will get to work on agreeing the terms of the new lease alongside the quantum of your recoverable costs with the leaseholder’s solicitor. At this stage you will need to consider whether to appoint your valuer to handle the negotiation. If the premium is relatively modest, and there is not a large difference between the premiums proposed in the leaseholder’s section 42 notice and your counter-notice you might decide to approach the leaseholder informally and try to settle matters yourself (thus saving further costs). However if there is a larger difference between your respective positions (as will usually be the case where the lease has an unexpired term of less than 80 years) you’ll probably be better off instructing the valuer to undertake the negotiation on your behalf.
If terms are not agreed either party can refer the claim to the First-tier Tribunal (Property Chamber) for determination. A Tribunal application must be made no sooner than two months, but within six months of the freeholder’s counter notice or the claim will be deemed withdrawn.
Once the terms are agreed the parties have two months to exchange contracts. If contracts are not exchanged your solicitor can serve a completion notice on the leaseholder. On completion your solicitor will ensure that any outstanding sums by the way of the premium and your recoverable costs are transferred.
The lease extension process is typically adversarial, and can seem daunting. Having a good professional team will take a lot of the hassle out of the process, and ensure that you are fairly compensated. Solicitors and valuers practicing in this area will have been through the process countless times, and will be able to provide you with the appropriate advice and support.