Property: Taking the Mystery out of Lease Extensions

Anyone who has ever owned a leasehold property is likely to have heard of the dreaded lease extension. Some are lucky enough not to have to worry about it during their ownership, but for others it is a necessary and costly process to ensure the sale-ability and mortgage-ability of their property. 

Siobhan Perrigo, Litigation Solicitor at our Petworth office explains how it should be done to make it as pain free as possible.

A leasehold property is one which is owned for a set period of time by means of a lease. A leaseholder (tenant) will have an agreement with a landlord (often referred to as a freeholder) which governs the terms on which the leasehold property is owned by the leaseholder.

The lease will usually dictate the terms, including the rent (if any) payable, term and the obligations of each party to the lease. As the lease is for a fixed period of time, when the fixed period is running out, the leaseholder has a right, to ask the freeholder to extend the term of the lease.

This right is only available to eligible leaseholders. In order to be eligible for a lease extension a leaseholder has to have owned the property for which a new lease is sought for at least 2 years. 

A consideration (otherwise known as a premium) is paid to the freeholder for the new extended lease. In order to safeguard the rights of leaseholders, there is a statutory process which can be, and in my view, should be followed in negotiating the lease extension.

It is of course possible for a freeholder and leaseholder  to follow a voluntary process for extending the lease but this does not give you the security of a set and timetabled process set by statute.  For the purpose of this article, though, I will focus on the statutory process which is governed by the Leasehold, Reform Housing and Urban Development Act 1993 (LRHUD).

Following the Right Process

In straightforward matters, this is a four-stage process which I would strongly recommend any leaseholder appointing a solicitor to do on their behalf.  The procedure has strict time limits and requirements which need to be satisfied in order to stay within the statutory process. Failure to comply with any one of the requirements could have a devastating effect. 

Stage 1 – Serve the Initial Notice

Assuming you, as a leaseholder, are eligible to apply for a lease extension, your appointed solicitor will prepare what is called an initial notice in terms of section 42 of LRHUD. 

This sets out:

  • the details of the parties to the existing lease,
  • the property for which an extension is claimed
  • details of the existing lease
  • the premium that you propose to pay
  • what additional terms may be proposed for the extended lease
  • the date by which the landlord is required to serve a counter-notice. 

Prior to serving the initial notice, you would have appointed a surveyor to advise you of the appropriate premium to propose paying when claiming a new lease. This is often lower than what you may end up paying to allow some negotiating room with the freeholder.

Once the notice has been served there are various consequences:  

  • You become liable for payment of the landlord’s costs related to the lease extension.
  • You have to  prove that you hold title to the property for which you seek an extension
  • You must pay a deposit equivalent to 10% of the proposed premium upon request by the freeholder
  • You must allow the landlord or their authorised agent to inspect the property to make their own valuation. 

It is for this reason that prior to sending the initial notice, your solicitor will likely require you to pay a sum of 10% of the proposed valuation for the premium so that this is readily available to pay over to the landlord as and when it is requested. 

The notice will also include the date by which the landlord needs to serve their counter-notice in terms of section 45 of the LRHUD.  This must be at least two months after the initial notice has been served on the landlord and any appropriate third parties. 

Stage 2 – Register the Notice

The initial notice must then be registered at the Land Registry to ensure that successors in title are bound by its terms.

Stage 3 – Landlord serves Counter-Notice

This must be no later than the date specified in the initial notice.  The landlord has three options here:

  • admit the claim which means they agree that you are eligible for a lease extension.
  • not admit the claim whereby the landlord does not think that you meet the criteria to be eligible for a lease extension.
  • refuse to grant a new lease on the ground of re-development. 

The second and third options are rarely exercised, so I will focus on explaining the process whereby the landlord admits the tenant’s claim for a lease extension. 

In the landlord’s counter-notice, they will either agree to or make you a counter-proposal on the premium to be paid.  The landlord will also comment on what other, if any, additional clauses they want included in any new lease.

Stage 4 – Negotiate the terms of the Lease and completing the new Lease

Once the counter-notice has been served the landlord and the tenant (generally via their surveyors and solicitors) will negotiate the terms of the new lease.  If the statutory process is being followed, the LRHUDA sets out certain mandatory terms that must be included. These are:

1.            A peppercorn rent if demanded.

2.            A term of 90 years plus the remainder of the term of the existing lease.

3.            The same terms of the existing lease save for minor modifications and statutory amendments.

4.            A clause giving the landlord the right to possession of the flat for the purposes of de-development.

The right to possession in the case of re-development referred to at 4 can only be exercised during the period of 12 months ending on the date the original lease would have expired in the last 5 years of the term of the new lease.

Getting it Over the Line

If the parties cannot agree on the terms of the new lease, either you or the landlord can apply to the Property Tribunal for a determination of the terms.  Once the terms of acquisition (terms) have been agreed or the Property Tribunal has made a determination as to what the terms of the new lease should be, the parties must complete the lease. 

The lease must be completed within two months of the terms of acquisition being agreed or the Property Tribunal making a determination. 

If the parties are unable to complete within that two-month period, an application may be made by either party to the Court for an order to either perform the obligations arising from the initial notice or be discharged from the obligations arising from the new lease.

If the terms are not agreed and no application is made to the Court then the initial notice is deemed withdrawn. This then means that you cannot apply for a lease extension for another year.

When the lease is completed payment of sums due to the landlord must be made.

Use a Professional

When you break the process down it doesn’t really seem all that complicated. Things become unstuck when there is a determined negotiation and a need to stick to the rigid timelines that are set in motion.

Because of this, I would not recommend that any party try and undertake this process themselves. Here at Anderson Rowntree Solicitors, we are expert at handling lease extensions to great success. We are here to guide you through each step of the way.

Siobhan  deals with all aspects of civil litigation. This includes neighbour/boundary disputes, tenancy disputes and possession claims, consumer issues, property litigation, business/partnership disputes, preparation of employment contracts and debt recovery

If you are looking to extend your current lease, call Siobhan today on 01798 342391 or email s.perrigo@ar-law.co.uk.