Lease Extensions Explained: The Step-By-Step Guide
If you have a leasehold property and need to extend your existing lease, but aren’t sure how, you’re in the right place.
Lease extensions can be a complicated, but necessary process for many property owners.
Remember, a leasehold property is a wasting asset, meaning it will continue to lose value until you don’t own the flat anymore, so you may find yourself in a situation where you need to extend your lease sooner than you anticipated.
If you’re looking for an explanation of the steps involved in renewing or extending a leasehold property, then this guide is the perfect place to start. Here, we’ll go through each step of the process, alongside some other considerations you should make along the way.
First Things First: Should You Extend Your Lease?
Of course, you should do something if you find yourself close to the end of your lease, but it’s important to ask yourself whether a lease extension is really worth it.
The statutory lease extension process is fine to protect your position for the time being – and only needs the flat in question to go ahead – but it can be expensive and the costs and/or premium required can quickly add up.
An alternative option could be purchasing the freehold of your property, rather than extending your lease through the current freehold owner.
This will give you more control over the management of your building and add value for potential future buyers. This will then give you the ability to essentially grant a longer (999 year) lease extension to yourself, with no expensive premium or litigation.
This option can take a little longer, and involves more people, but it provides the best outcome in the long-term. At TFC, our experts can help you to decide which option is best for you and your property, as well as providing expert support throughout each step of the freehold purchase process.
Lease Extensions Explained: The Basics
In landlord and tenant legislation, lease extensions must be done in the correct manner. So, if you do decide to go ahead with the lease extension process, there are a few initial steps you can take to ensure you’re prepared.
You’ll need to:
- Check you are eligible (including by identifying the ‘competent landlord’)
- Choose and instruct professional advisers (surveyor, solicitor, project manager, etc.)
- Assess the premium (the valuation)
- Make sure you have the money you will need to complete the procedure
- Review the legal position
- Prepare the Section 42 notice
- Prepare for the statutory process.
These preparatory steps are essential to the lease extension process, and can help streamline the procedure when done correctly.
The Lease Extension Process: Your Step-by-Step Guide
This step-by-step guide will talk you through the steps associated with Statutory lease extensions, the most common form of lease extension procedure.
In line with the Leasehold Reform Housing and Urban Development Act 1993, all residential flat owners are entitled to:
- Add 90 years to the term of the lease
- At a peppercorn (zero) ground rent.
This entitlement will be granted, provided that:
- The property must be a flat s.101(1) – Beware of abnormal situations here: is it a house or flat? What is the use of the flat?
- You own a long lease (original term of over 21 years)
- You have owned the property for a continuous period of 2 years prior to the relevant date s.39(2): This starts with the registration date at HMLR not the date transferred.
This is in return for a payment – or premium – to the freeholder which will need to be assessed by a specialist valuer. The usual lease extension price will be the freeholder’s costs, plus often a percentage of any increase in value.
A flat will never qualify for a lease extension if it is:
- Owned by a Landlords Charitable Housing trust
- Part of a charities work
- A business or commercial lease
This means that the flat itself must be a residential property and not intended for business or commercial purposes.
Once the freeholder has provided all the relevant information, a valuation can be obtained from an independent valuer. It is important to note that most lenders will not lend on a lease extension until the valuation has been given. So it is essential for you to obtain an accurate valuation of the lease extension before making any payments.
Here are some key considerations to note at this stage in the lease extension process:
- The price payable is calculated in accordance with a statutory formula – Sch.13 Part II
- Valuation reports often provide a best and worst-case valuation for the client with an advised opening offer
- Your solicitor will work with the valuer to ensure open communication in negotiations
- The Tribunal will not be able to determine premium higher than Landlord’s Counter Offer or lower than Leaseholder’s opening offer
- Section 42 Notice of Claim
Once you have a valuation, the next step is to serve a section 42 notice (the ‘notice of claim’). Key details needed for serving this section 42 notice are as follows:
- What to serve? Address of the flat, terms of the existing lease, description of the proposed new lease, premium you are offering.
- Who to serve on? All landlords, freeholders and third parties.
- Where to serve? Demand, Title, Lease, Companies House.
- Before serving – Prepare deposit, get authority to sign.
- Service – No prescribed form, but must be in writing and may be sent by post; must be originals not copies.
To create this notice, you will need to consult a qualified solicitor and surveyor. The notice must be served on all relevant parties and requires certain details such as full address of the premises, description of the existing lease, proposed lengths and terms of new lease, details of premium offered etc.
The section 42 notice needs to be carefully worded as any mistakes may result in the application being unsuccessful. The lease extension will not be granted until this notice has been served and all the relevant information is provided.
Once the notice is served, you must wait for the freeholder to respond or make a counter-offer within two months of service.
- Post Section 42 Notice: Landlord’s Requests
At this stage, the freeholder may respond by making a counter-offer in relation to the lease extension. This will involve them serving a ‘section 45’ notice which outlines their request for additional payments or amendments to the agreed terms of the new lease.
At this steps, the freeholder or landlord may:
- Request for inspection: s.44 – must give 3 days notice and can visit multiple times; can be exercised by all landlords with a valuable interest to assess premium offered across multiple inspections.
- Obtain proof of the authority for signing s.42 from the tenant: must receive written authority from all registered tenants.
- Provide evidence of service on any third parties: s.62(1) – must provide a copy of S.42 to any third parties who may have an interest in the flat e.g. a headlessee.
These are just some examples of the requests that could be made by a landlord prior to engaging in lease extension negotiations. It is important for you to ensure all these requests are met as they can affect your chances of success. Furthermore, it is important to note that most of the requests are statutory and must be complied with.
For this reason, it is advisable to obtain professional legal advice when negotiating for a lease extension. This will help you to ensure all requests and deadlines are met, as well as helping you negotiate the best possible outcome from the process.
- Section 45 Counter Notice
Once all of the above requests have been met, the landlord can then issue a ‘section 45’ counter notice. This is their formal response to your section 42 notice and outlines any proposed changes to the lease extension as well as establishing an opening premium offer.
This counter-notice should:
- Admit or Reject Claim: The s45 counter-notice should state which proposals it accepts and rejects, and if rejecting any – make counter proposals.
- Outline Key Dates: 6 months from date CN given s.48 (2) or is deemed withdrawn; can apply to First Tier Tribunal after 2 months. s.48 (1))
- Serve Notice of Separate Representation: Where a landlord is represented by a solicitor, they must serve notice on tenants of that fact; failure to do so may result in costs or additional legal fees being awarded against them.
- Offer Valuation: Landlords can obtain independent valuation s. 46 & 47 if unconvinced of the tenant’s premium offer; these valuations can be used as the basis for settlement negotiations.
- Terms of Acquisition
Next up when extending a lease, you will have to agree on the final terms of acquisition. This process will likely involve:
- Premium negotiation – Valuer: Agreement between parties over whether to accept or reject any rights given up as part of new lease; negotiations over premium payable by tenant.
- Lease terms negotiation – Solicitor: Agreeing on the new lease term, ground rent payable, service charges, etc will require the support of lease extension solicitors.
- Settling the final terms of acquisition: Including drafting the form of lease so as to give effect to the terms of acquisition.
- If not agreed within 6 months, FTT application – (s. 48 (1))
- Once agreed, 4 months to complete – s. 48 (3) and s. 48 (6): If not completed within the required time, a County Court application is needed, or the agreement will be deemed withdrawn.
Once all the terms of acquisition have been agreed, completion can take place. This is when the tenant will usually be required to pay the premium and any other costs associated with the lease extension. The key steps here are:
Agree completion date by agreement: this is the date on which all parties are legally obliged to meet their obligations under the lease extension agreement.
Notice to be completed and served by either party once terms agreed: to be completed the first working day 21 days after service of the Notice.
- Solvency of the Landlord?
- Requisitions form sent?
- OS2 search (if required)
- Joint tenants or Tenants in Common?
- Restrictions on FH title? Consent from Mortgagee?
Then, the tenant pays:
- The premium payable.
- Arrears of Ground Rent or Service Charge due under the previous lease.
- Reasonable s.60 costs payable to the landlord.
- Their own legal fees and valuation costs relating to the claim of any FTT apps/CC apps.
Once all of this is done the lease extension agreement can be completed and registered at HM Land Registry. This will give it legal effect and make the extended lease a legal document, protecting both landlord and tenant’s rights in regards to the property.
It’s important to make sure all documents are in order and that any requirements of HM Land Registry have been met.
When the lease extension is registered, the official copy should be sent to both parties, as well as being retained by their respective solicitors for future reference. By registering the lease, you’ll make sure that the extended lease is legally binding and enforceable.
Once registered, the parties will be in a position to notify their respective lenders of the lease extension, if necessary. This should be done within one month of completion in order to ensure any security held by them (e.g. mortgages) remains valid.
Beyond this point, the leaseholder can enjoy the benefits of their extended lease, safe in the knowledge that it is legally binding and enforceable.
Additional Lease Extension Procedures To Be Aware Of
Some additional procedures may need to be considered if the lease extension is part of a larger property transaction, or if there are any roadblocks during the process. These include:
- First–tier Tribunal (FTT): The FTT has jurisdiction to decide if a landlord is not willing to agree reasonable terms for the lease extension, or if they are unreasonably withholding their consent.
- County Court: Alternative to the FTT. The county court can grant a new lease and impose conditions on it.
- Assignments of Claims: If the claimant tenant wishes to assign their claim to an incoming tenant, they may do so by applying to the FTT who will decide if it is appropriate in the circumstances.
- Lease Reforms: The government has introduced reforms to the lease extension process which are designed to make it simpler and quicker. These include the introduction of a statutory premium figure, as well as removing the need for solicitors in certain circumstances.
Remember, these procedures can be complex and it is essential that you seek professional advice from a solicitor or surveyor before entering into any lease extension agreement.
Voluntary Lease Extensions
Informal lease extensions can be a useful option for tenants who want to extend the term of their lease while avoiding costly court proceedings. These informal agreements are not legally binding, but they do provide an avenue of negotiation between the tenant and freeholder which can result in satisfactory terms being agreed.
An informal lease extension involves the tenant and freeholder coming to an agreement on the terms of a lease extension without any official documentation or court proceedings. This could include things like agreeing a premium, a rent review date, ground rent and so on.
While an informal or voluntary lease extension can sometimes be a good idea, always be prepared to pursue a statutory claim if things aren’t going your way, and don’t let yourself be taken for a ride in negotiation by the freeholder.
Looking For Expert Support With Your Lease Extension or Freehold Acquisition?
If you’re intending to extend a lease, having an understanding of the process outlined above will be essential. This includes knowing what steps need to be taken, who needs to be involved (such as solicitors and surveyors), and so on.
Alternatively, if you want to save time – and headaches – on the complex processes outlined in this guide, you could work with a freehold purchase expert to collectively buy your freehold.
At The Freehold Collective, we have a team of qualified and experienced professionals who can guide you through the freehold purchase and collective enfranchisement process – from start to finish.
We can advise you on whether freehold acquisition is a better option for you than a statutory lease extension, and help you to make the right decision.
Ultimately, if you’re looking for support in acquiring your freehold or are querying extending a lease, contact us today and find out how we can help.