As mentioned previously, the piece of legislation that allows for this to happen is the Leasehold Reform Housing & Urban Development Act 1993 (as amended by subsequent Acts). Under the act then a leaseholder has an automatic right to require that their freeholder offer them an extension to their lease term. The extension itself is not for negotiation. By this I mean it is an addition of ninety years to the unexpired term with the ground rent reverting to a peppercorn rent.
Who qualifies for this right?
If only it were that simple though. There are a couple of things to know to begin with. To be a qualifying leaseholder then the owner must have owned the property for more than two years. Without this two-year period of ownership then no statutory right exists, and the owner would be relying upon the freeholder’s “good will” to consider granting a lease extension hence using the voluntary route.
In my experience it really does depend on the freeholder whether they are prepared to do this or not. Some will be reasonable and see the need for a lease extension as the lease is short so will agree terms as they know they will get a premium for the same. Sadly some, which again in my experience tend to be the larger commercial freeholders, take the view that they are in the business for the long term, so they will be looking to maximise the premium they can demand so why do it before the two-year qualifying period has been met?
It is possible to take a previous owner’s qualifying period (assuming the previous owner had more than two years ownership at the time of sale). This can be achieved by having the seller serve the relevant notice on the freeholder following exchange but before completion then assigning the right to the new owner following this.
The other simple qualifying criterion (if we can call anything in the process simple) is that the lease is a long lease more than 21 years from when it was originally granted. The term of the lease at the point of extension is not relevant, it is the term at the time of creation. This is of course easy to verify.
However even if the leaseholder satisfies these criteria then they will not be a qualifying leaseholder if either of the following apply:
the landlord is a charitable housing trust and the flat is provided as part of the charity’s functions
it is a business or commercial lease
In relation to the first point then again in my experience most such organisations will consider a lease extension on a voluntary basis. Their very reason for existence is to be beneficial to others so they will most likely consider offering the same.
Now the second point one would think is quite self evident. However, with the plethora of mixed use development sites in the past twenty years this may not be straightforward. For example, would a “live work unit” granted with the aim of having living accommodation above a business qualify? This could be an issue moving forward with time.
How do you start the process?
Assuming your client can meet the two criteria listed above then they need to start the process. How? Well let me enlighten you.
To commence with then your client will need to serve a section 42 notice under the 1993 Act aforementioned. This needs to be served on the party known as the competent landlord. A competent landlord is the landlord who is able to grant an extension to the lease term of ninety years. This means that they have to either serve on the freeholder or if there is a head lease serve the same upon the head leaseholder provided of course the head leaseholder has a lease that is longer than the lease that will be created.
For example, if the head leasehold only has one hundred years remaining on the term at the time of demanding the extension and the under lease only has fifty years remaining then this would be an issue. The new underlease would be for one hundred and forty years once extended which would be longer than the head lease. The head lease would expire before the underlease thus causing issues.
Now that you are aware of the above then the notice has to be prepared ready to be served. It needs to be served on all the landlords. By this I mean the freeholder and any other intermediate leases from which your clients underlease emanates. If there happens to be a management company created for the block that the flat is within then the notice should be served on them. They may have no more than a ceremonial function but many a time I have seen some commercial freeholders’ solicitors reject a notice on the basis that the management company named in the lease was not named.
Now on to the notice itself.
Section 42 notice – first steps
One glaring item that needs to be within a section 42 notice is the tenant’s offer for the premium of the lease extension. Now believe it or not the legislation does not specifically require a formal valuation to take place. However, should matters become contentious later then having a valuation from an expert surveyor as mentioned earlier is crucial. I would strongly urge you to make sure your clients follow this advice.
Once your client has provided you with a figure from their valuer then you need to set about gathering all the information that needs to be in the notice.
You will need to obtain the following information:
the identity of the competent landlord, a person, or company, name and address
details of any intervening or head leases and the identity and address of the relevant head lessees
a copy of clients own lease and the registered title
You should be able to identify the competent landlord from the ground rent demands, general correspondence you have received from them or if all else fails by checking the Land Registry (assuming the same is up-to-date). It never ceases to amaze me the number of freeholders that fail to register their title at the Land Registry. Some of the largest landlords are the worst at this.
Now you are asking what happens if the freeholder/landlord is absent? Well if that is the case I would refer you to the next chapter in this book which addresses the same.
Section 41 of the Act provides a right for leaseholders to serve notices on their immediate landlord, the freeholder (if different) or any other persons with an interest in the property, requiring details of that interest.
This information would include the name and address and of the freeholder or intermediate landlord and length of the lease and the extent of the premises.
The recipients of the Notices are required to respond within 28 days. The service of the Notices does not formally start the application for the new lease or commit you in any way and there is no liability for costs. If your client decides to back out at this stage, then it would have been wise to ensure you had monies on account of costs at the outset to at least cover your time/costs incurred.
The Notice triggers the statutory procedures for acquiring the new lease and the leaseholder is liable for the landlord’s reasonable costs as from the date he received the Notice. It is therefore important that the Notice contains no inaccuracies or misdescriptions because, although these can be corrected by application to the County Court, it is an expense that should be avoided. An incomplete Notice can be rejected as invalid. Your client won’t thank you if you get the same wrong and couple with this that it will of course set the wrong tone to the freeholders and their solicitors moving forward.
If the “competent landlord” is not the immediate landlord, then the original Notice will have to be served on the competent landlord and copies on the other landlords. The Notice to the competent landlord should specify to whom else a copy is being given. I have witnessed numerous times a notice being rejected because not all the relevant parties were served with a notice. The most common being the management company referred to within the lease itself.
A protection for leaseholders is the ability to register the Tenant’s Notice with the Land Registry. This provides protection for the leaseholder against the landlord’s sale of the freehold. Any purchaser of the freehold, after the registration of the Tenant’s Notice will take the freehold subject to the application for the new lease. The procedure will therefore be able to continue as though the new owner had originally received the Tenant’s Notice. You can register this using a Unilateral notice provided you have served the section 42 notice and make clear reference to this on the application form (i.e. sending a copy of the same with the application to the Land Registry.)
The service of the Tenant’s Notice also fixes the “valuation date” as the same date as the Notice. The valuation date is when the variables affecting the price are set, for example, the remaining number of years left on the lease and the present value. Therefore, however long the negotiation or determination of the price takes it will be based on the factors applying on the date of service of the Tenant’s Notice.
Again, this highlights the need to ensure that the notice is correct. If the notice must be reserved, then a further valuation will be needed for the later date. If for instance the lease had 80 years remaining on the term at the time the notice was served, then reserved after the same had slipped below 80 years then the cost of the premium would naturally rise for your client. Who do you think your client will look to for that increase in cost?
Serving the notice itself
The requirements of the Tenant’s Notice are set out in S42(3) of the Leasehold Reform Housing and Urban Development Act 1993. It must contain the following:
the full name of the leaseholder and the address of the flat – make sure this matches the details as per the Land Registry title for the property exactly;
sufficient information about the flat to identify the property to which the application relates – I would suggest this should include the full Land Registry description of the property;
details of the lease including its date of commencement and its terms – again exactly as per the Land Registry held lease or original lease if unregistered;
the premium proposed for the new lease and or other amounts payable where there are intermediate leases involved – follow the advice of your client’s chosen valuer – you are not qualified to give valuation advice no matter how tempted you feel to do so;
the terms that the leaseholder proposes for the new lease; (if different from the present lease) – I would expect this to be the statutory offered terms as others will be queried unless favourable to the freeholder which would be highly unusual
the name and address of his representative if one has been appointed – you should know your own contact details; and
a date by which the landlord must give his Counter-Notice, which must be not less than two months from the date on which the Tenant’s Notice is served – personally I always add five days to the time period just to make sure.
In relation to the premium quoted in the Notice, this may not be the price eventually agreed after negotiation or determined by the Tribunal (it would be highly bizarre if it was accepted), but it will be the figure from which the landlord calculates the deposit he requires. The premium proposed must be a realistic opening offer. Whilst it might be tempting to offer a satsuma and a packet of peanuts in order to reduce the amount of deposit required you should avoid this course of action. If you do offer a ridiculously low offer, then the Notice runs the risk of being found invalid. Again, who do you think your client would look to for any losses incurred for poor advice on serving an unrealistic valuation in the notice?
So, the notice has been served – what next?
After the service of the Tenant’s Notice the landlord is entitled to…