A new lease of life

By Rawdon Crozier, barrister from KBG Chambers and Ibraheem Dulmeer, Legal Adviser at LEASE

September 2017

This article first appeared in the RICS Property Journal.

Under the Leasehold Reform, Housing and Urban Development Act 1993, qualifying leaseholders can extend their term by 90 years and reduce the ground rent to nothing. A qualifying leaseholder is one who has owned a long lease – more than 21 years from the date of grant – for the preceding two years. A party who is purchasing the long lease may take the benefit of the right to extend, provided notice has been served by the qualifying tenant – i.e. the tenant selling – and such benefit has been assigned together with the assignment of the lease.

There are usually four stages in the process, although it is not essential to follow them.

Stage 1

• The leaseholder serves a notice on the landlord under section 42 of the act; the date of service fixes the valuation date – a strict timetable is imposed after service.
• The landlord’s “reasonable, professional fees” will be paid by the leaseholder from service of the notice; the landlord may request payment of a deposit – either 10% of the premium quoted in the notice or £250, whichever is greater.
• The notice should be lodged with the Land Registry so any subsequent freeholder is bound by the process.

Stage 2

• The landlord should serve a counternotice within two months of service of the notice, in default of which the extension is granted on the terms in the notice.
• The counternotice must:
  1. admit the leaseholder’s right to the new lease and either accept their terms or propose alternatives
  2. not admit the leaseholder’s right, giving reasons that must be determined by the county court; or
  3. claim right of redevelopment.
• After service of the counternotice, there is a two-month statutory negotiation period for agreement to be reached on the terms of the extension.

Stage 3

• At the end of the negotiation period, an application can be made to the First-tier Tribunal – the Property Chamber, or the Leasehold Valuation Tribunal in Wales – the tribunal.
• If progress is being made on agreeing the terms, it is usual to allow additional time for further discussions, but any application to the tribunal must be made within six months of the service of the counternotice or the notice will be deemed to be withdrawn.
• Once the premium has either been agreed or determined by the tribunal, the solicitors would agree the form of the new lease and proceed to complete the lease extension.

The final stage

• A completion date is determined for the lease extension.
• On completion, the extended lease is lodged at the Land Registry. A Stamp Duty Land Tax return must then be made within 30 days of the completion of the revised lease to HMRC.

Be aware

Inaccuracies or misdescriptions in notices may lead to increased costs or affect their validity. Deemed withdrawal can occur in many circumstances, such as not making an application in time, assigning the lease without assigning the benefit of the notice, or not completing the extension within four months of agreeing terms.

For leases with less than 80 years left, the correct approach to valuation is in limbo following the granting of permission to appeal from the decision in Sloane Stanley Estate Trustees v Mundy [2016] UKUT 223 (LC).

Informal lease extensions can produce a commercially sensible solution for both parties. Landlords may negotiate an ongoing entitlement to ground rent that is more than nominal in return for a reduced premium, or other terms that would not be ordered under the Act.

Those advising leaseholders should be extremely wary about negotiating an extension without serving a notice and engaging the statutory scheme.
Even when short-term savings on the cost of an extension are offered, these may be offset and eclipsed by longer-term costs. When advising a leaseholder, calculate the respective short- and long-term costs of what is being offered.

Delaying service of the notice will lead to a later valuation date, which will generally increase the costs of an extension should negotiations fail. Advising leaseholders to serve a notice and seek an extension under the act will often be the most prudent course.