My leaseholder asked for a lease extension: Advice for freeholders

Niki Adkins, Head of our Leasehold Property team, provides advice for freeholders who have been asked for their lease to be extended.

She looks at the steps involved in the statutory and non-statutory lease extension processes, outlining what freeholders need to do.

What lease extension options are there?

Your leaseholder may ask you to extend your lease.

There are generally two ways in which a lease extension can be performed:

1. A statutory lease extension (Receive a Section 42 notice)
2. A non-statutory lease extension (informal extension)

What is a Statutory lease extension?

A Statutory lease extension, under the Leasehold Reform Housing and Urban Development Act 1993, entitles qualifying leaseholders to a 90 year extension to their current lease at a peppercorn ground rent (nil).

I have been served a Section 42 notice – What now?

If this is the case, you should pass this to your solicitors immediately as there are time scales contained in that notice. You will also need to arrange for a valuer to provide a valuation report.

Can a freeholder negotiate a lease extension?

When you receive a S42 Notice you should respond with a counter notice (Section 45 notice), this must be done by the date stated in the Section 42 notice. Failure to do so would result in the leaseholder being granted a lease extension at the price offered in the notice.

The leaseholder is responsible for your reasonable legal and valuation costs.

What should I do after receiving a Section 42 notice?

Next steps following receipt of s42 notice:

1. Instruct a solicitor who will check that the S42 Notice is valid, request confirmation of qualification of the leaseholder’s entitlement to the lease extension and request 10% deposit of the offer figure.
2. Instruct a surveyor to carry out a valuation.
3. Upon receipt of the valuation report serve counter notice proposing a counteroffer to the premium
4. Your valuer and that of the leaseholder negotiate the premium.
5. Your solicitor and the leaseholder’s solicitor agree the content of the new lease.
6. If the premium and format of the lease are not agreed within 6 months from the date of counter notice the leaseholder can make an application to the First Tier Tribunal for the price and terms of the lease to be agreed.  If an application is not made within this time frame the Section 42 notice is deemed withdrawn.  If this happens the leaseholder cannot serve another Section 42 Notice for 12 months.
7. Once terms have been agreed there is a period of 4 months for completion to take place otherwise there is a deemed withdrawal.

What is an informal lease extension?

An informal lease extension means you simply agree terms with your leaseholder ‘up-front’; usually subject to you obtaining valuation advice at the leaseholders’ cost. There are no specific terms that must be agreed on.

How is the price of an informal lease extension determined?

The premium that should be charged for the lease extension needs to be negotiated between the parties. However, it is not unusual for freeholders to offer the premium on a “take it or leave it” basis.  You may be willing to agree a joint instruction of one valuer who will provide their opinion of a ‘fair’ price to be paid for the lease extension.

Alternatively, you may wish to instruct the Valuer to work for you solely and in these circumstances the contents of the report are not disclosed to the leaseholder.

Who pays for valuation in an informal lease extension?

In either circumstance, the cost of the valuation should be paid for by the leaseholder requesting the extension. The valuer’s fees would need be paid upfront or a solicitors’ undertaking would need to be obtained requiring them to pay these fees.

The valuer would be able to advise on the terms to be offered – eg. offering terms similar to that available under the 1993 Act or 99 years at a ground rent?

Once terms are agreed, you will need to instruct a solicitor to draw up the new lease and complete the extension.

Can you refuse to extend a lease?

For informal lease extensions, yes. Just because a leaseholder asks for an informal lease extension, you are not obliged to grant one. 

To gain a more in depth understanding on the ins and outs of lease extension refusal, please see my colleague Niki Adkins' article here.