Lease Extensions for Flats

There are two ways in which tenants can extend their lease. The first is for the landlord and tenant to negotiate a lease extension by agreement (please see Informal Agreement) and the second is for the tenant to claim the statutory right to a lease extension under the Leasehold Reform, Housing and Urban Development Act 1993 (‘the 1993 Act’).

The legislation is complex, but broadly speaking tenants qualify for the right if:
• they hold a residential lease of a flat which was originally granted for a term of over 21 years. This means commercial and short-term tenants will not be considered qualifying tenants; and
• they have been registered as proprietor of the flat for a minimum of two years.

If the tenant qualifies for the right, they are entitled to claim a 90 year lease extension, at a peppercorn (nil) rent, in return for paying a premium to the landlord.

The parties are advised to obtain a professional valuation from a surveyor. This valuation is specific to lease extensions and is not the same as a normal valuation of a property. We can assist you in recommending a surveyor to calculate the likely cost should you require such a recommendation.

The surveyor’s valuation will normally provide a range of values:
• A best case scenario value; and
• A middle value representing what the surveyor thinks is the actual value of the lease extension; and
• A worst case scenario value.

The tenant’s notice of claim (known as a section 42 notice) has to be carefully drafted as the legislation has strict requirements that must be complied with to avoid the notice being considered invalid. The notice will contain various provisions and proposals about the terms of the transaction. The most important proposal is, unsurprisingly, the amount that the tenant wants to pay. The tenant’s notice is, in effect, an opening offer to begin negotiations as it represents the absolute minimum the tenant will pay. It must be served on the landlord who has sufficient interest in the property (‘the competent landlord’) which might be the freeholder or an intermediary landlord and any third party to the lease.

Please note that the tenant of a missing or unidentifiable landlord is unable to extend their lease but may still acquire the freehold subject to permission of the court.

The notice of tenant’s claim is capable of being assigned to an incoming tenant without that tenant having to wait two years.

Once the notice is served, the tenant becomes liable for the landlord’s reasonable valuation and legal costs (but not those incurred in connection with an application to the First-tier Tribunal). The notice will give a minimum of two months for service of the landlord’s counter-notice (known as a section 45 notice). This is a strict deadline. During this period, the landlord may require the tenant pay a deposit of £250 or 10% of the cost proposed by them (whichever is greater). If the landlord does not serve the counter-notice within this period, the tenant will be entitled to apply to court to have the lease extension granted at the price proposed in their notice.

The counter-notice will either admit or deny that the tenant is entitled to claim a lease extension, and if admitted, which of the tenant’s proposals are accepted. If the landlord does not accept any of the tenant’s proposals, the counter-notice must give a counter-proposal. Most often, this will take the form of a counter-offer on the price. This effectively sets the most that the tenant could possibly pay and forms the upper boundary of the negotiation.

There are strict restrictions on the modifications that have to be made to the lease which mainly relate to correcting errors or inconsistencies and updating.

Following service of the counter-notice, a six month statutory negotiation period begins. During this time, the parties attempt to negotiate and agree all the terms of the transaction. In all but a few low value cases, the parties’ surveyors will conduct the price negotiation as the surveyors are best placed to deal with valuation matters.

If an agreement is not reached within the six month deadline, the tenant’s notice will be deemed withdrawn. This will end the process, the tenant will be liable for the landlord’s costs up to that point and will not be able to serve notice again for 12 months (at which point the lease extension will be more expensive). This is also the case if the tenant chooses to withdraw the claim. If agreement is looking unlikely and the deadline looming, tenants usually make an application to the First-tier Tribunal to ask them to make a determination on the points in dispute.

The application to the Tribunal stops the clock and the deadline can safely pass without the tenant’s notice being withdrawn.
Once the points in dispute have been agreed or determined by the Tribunal the parties enter into a separate set of deadlines for preparation of the necessary documents and completion of lease extension.

Lease Extensions for Houses

As with flats, the tenant may negotiate a lease extension by agreement or alternatively claim a statutory right to extend the lease of their house and premises under the Leasehold Reform Act 1967 (‘the 1967 Act’).

If the tenant and the building qualifies, the tenant is entitled to claim a 50 year lease extension at a ‘modern ground rent’ (which includes establishing site value). Whilst no premium is payable to the landlord, the qualification criteria are tighter than acquiring the freehold and the interest less valuable. Therefore, in practice this right is not commonly exercised.

Fundamental to the right to extend a lease is the definition of ‘house’. In basic terms, the building should qualify if it:

• is designed or adapted for living in; and
• can reasonably be called a house; and
• maybe divided horizontally into flats or maisonettes and is not divided vertically.

The building does not have to be detached.

However, please note that the definition is far wider than one might imagine and there is ongoing case law on the subject.

As regards the tenant, the legislation is complex and exceptions apply, but broadly speaking tenants qualify for the right if:
• they are the tenant of the whole of the house (unless they are already the freeholder of those parts of the house of which they are not a tenant) but the tenant need not be the tenant of the premises; and
• they hold a lease which was originally granted for a term of over 21 years. Unlike flats, certain commercial tenants will be considered qualifying tenants; and
• the lease has been granted at a low rent and the property falls within certain rateable value limits; and
• they have been registered as proprietor of the house and premises for a minimum of two years (trustees, trust beneficiaries and personal representatives or family members succeeding to a tenancy on death might also qualify).

It is strongly advised to obtain a professional valuation of the rent payable from a surveyor with specific experience of the 1967 Act. We can assist you in recommending a surveyor to calculate the likely cost should you require such a recommendation.

The surveyor’s valuation will normally provide a range:
• A best case scenario value; and
• A middle value representing what the surveyor thinks is the actual value of the rent; and
• A worst case scenario value.

The notice of tenant’s claim should be in a prescribed form and carefully drafted to avoid the notice being considered invalid. The notice will contain various particulars of the claim including the extent of the claim, that the tenant has a right to extend the lease, the section of the 1967 Act under which the right arises and the section under which the rent is to be valued. It must be served on not only the freeholder but any persons holding a legal interest in the house and premises superior to the tenant but it should be noted that certain bars apply to serving an effective notice.

The service of a notice has various effects. Principally, that it creates a binding contract between tenant and landlord for the grant of a lease extension and an obligation on the tenant to pay for reasonable valuation and legal costs of the landlord (but not those incurred in connection with an application to the First-tier Tribunal). The parties may agree to withdraw from the contract at any time. The notice will also trigger other obligations. It will give a two month deadline for service of the landlord’s notice. If the landlord fails to serve an effective notice within this period, the tenant will be entitled to apply to court to have the lease extended but the landlord still retains the right to challenge the tenant’s notice.

Please note that the tenant of a missing or unidentifiable landlord is unable to extend their lease but may still acquire the freehold subject to permission of the court.

The notice of tenant’s claim is capable of being assigned to an incoming tenant without that tenant having to wait two years.

The landlord’s notice (which should also be in a prescribed form) will either admit or deny upon specific grounds the right of the tenant to claim a lease extension. If admitted, it will also state in the landlord’s opinion the basis for the valuation or whether the house and premises are exempt.

It is important to note that a landlord may apply to court for possession of the property on the grounds that:
• he wishes to redevelop the house and premises; or
• he or an adult family member reasonably require occupation of the house as their main residence if it was purchased or built prior to 18th February 1966 so as to avoid the effect of the tenant’s notice.

As with flats, there are strict restrictions on the modifications that have be made to the lease which mainly relate to correcting errors or inconsistencies and updating. Additionally, under the new lease, there is no right to extend the lease further or protections for the tenant or sub-tenant of security of tenure under the Landlord and Tenant Act 1954 or rent increase under the Rent Act 1977. Furthermore, it is possible that the tenant may pay more to acquire the freehold following a lease extension.

If the parties are unable to agree the terms of the new lease, an application must be made to either the First-tier Tribunal or County Court to make a determination depending upon the nature of the dispute.

Once the points in dispute have been agreed or determined, the parties enter into a separate set of deadlines for preparation of the necessary documents and completion of the lease extension

Informal Agreement

This is often the most straight forward means of extending a lease. There are no particular qualifying criteria or unusual procedures, as the tenants are not exercising their statutory rights. All that is necessary is for the tenant(s) to approach the freeholder (or vice versa) to negotiate. Please note that some landlords will require you serve a statutory notice.

Depending on the circumstances, the landlord might need to follow the section 5 right of first refusal formalities before selling the freehold by agreement (please see Right of First Refusal).

The key point here is that the extension or acquisition proceeds by agreement. You must always bear in mind that neither party is under an obligation to proceed. All the terms are up for negotiation and it will come as no surprise that often the main topic on the table is the price.

Once the parties agree to proceed, you are best advised to obtain a professional valuation from a surveyor with specific experience of the legislation.

Once you have the valuation, the parties can begin negotiations over the price and any other terms of the transaction.

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