The Statutory Procedure
Under the ‘Leasehold Reform Housing and Urban Development Act 1993 (as amended) (“the Act”)’ it is possible for a tenant to make an application for the grant of an extension to their existing lease of residential property. This guide has been produced to assist those tenants who may wish to make a lease extension application to understand the process and work involved to do that.
Why make an application for a lease extension?
It is not always appreciated that as the length of a lease reduces, so may the value of your property. Additionally, the shorter the term of the lease remaining, the less likely it will be that you will be able to re-mortgage the property should you wish to do so. Further the length of the lease may also mean that a potential buyer of the property will not be able to secure mortgage funding to enable that purchase to proceed. Therefore to reverse your property’s decline in value and make it more attractive to mortgage providers, it is always worth considering making the application for a lease extension.
What are the terms of the lease extension?
The Act entitles a tenant (subject to fulfilling certain criteria – see “Do you qualify?” below) to apply for the grant of a new lease for a term of 90 years plus the unexpired term of their existing lease, at a “peppercorn” rent (i.e. rent free).
What about the other terms of the new lease?
The new lease will otherwise be on the same terms as the existing lease save for minor changes and certain statutory requirements. For example, modifications can be made to take account of the omission from the new lease of property included in the existing lease but not comprised in the flat; of alterations made to the property since the grant of the existing lease; and so as to remedy a defect in the existing lease.
Given that the Act provides perpetual renewal rights, there will be excluded from the new lease any term that provides for or relates to the renewal of the lease; confers any option to purchase r right of pre-emption; or provides for termination of the existing lease before its term date otherwise than in the event of a breach of its terms. The new lease must also contain a clause giving the landlord the right to obtain possession of the flat if the landlord intends to carry out development works and could not do so without obtaining possession. An application to Court is required and the landlord may only make that application for possession at the end of the term of the existing lease. The tenant is entitled to receive compensation from the landlord for the loss of the flat in such cases.
Do you qualify?
To qualify as a tenant for the purposes of the Act you must own a long lease of residential property and have owned it for the last two years. Please note, however, that you will not qualify where your landlord is a charitable housing trust and the flat is provided as part of the charity’s functions. Additionally you will not qualify if the property is within the precinct of a cathedral, if it is a National Trust property, or is Crown property.
How do you apply for a lease extension?
The formal process is commenced by the tenant serving a notice on the landlord exercising the right to acquire a new lease. The notice must fulfil certain statutory requirements which include (but is not limited to):
- stating the full name of the tenant and address of the flat;
- giving sufficient particulars of the property and the lease of it (date, term and date of commencement of term);
- specifying the premium which the tenant proposes to pay in respect of the grant of the new lease (please note this may not be what the final agreed premium is following negotiation or determination by the Leasehold Valuation Tribunal);
- specifying the terms which the tenant proposes should be in the new lease; and
- specifying the date by which the landlord must respond to the notice by giving a counter-notice (which must not be less than two months from the date on which the tenant’s notice is served).
After the tenant’s notice is served, the application will follow a formal procedure, further details of which are referred to below.
Should you do anything before serving notice on the landlord?
The short answer is yes! Before serving the notice it is imperative that thorough investigations are carried out to ensure you have and know everything you need to embark on the process; remember, as soon as the notice is served:
- the tenant is liable for the landlord’s costs as from the date the landlord received the notice (irrespective of whether the matter is completed); and
- the statutory procedure has commenced and the tenant may be subject to information requests and must comply with the time limits set.
Preparatory work should include:
a) Checking you are entitled to make the application for the lease extension:
See above “Do you qualify?”
b) Identifying the “competent landlord” on whom the tenant’s notice should be served:
This is the person who has an interest in the property over 90 years longer than the tenant’s current lease. It is normally the tenant’s immediate landlord who is the freehold owner of the property but this is not always the case.
In some circumstances the landlord may not be “absent” (for example, in receivership) or may not be found. An application for the lease extension is still possible in those circumstances but a court application and Leasehold Valuation Tribunal proceedings may be required.
c) Obtaining a valuation regarding the premium:
A professional surveyor/valuer should be instructed to provide a best and worst case valuation of the premium and to advise on the figure to be put in the tenant’s notice. The surveyor/valuer can also respond to the landlord’s counter-notice and deal with the negotiation and settlement of the premium and, if necessary, provide representation at the Leasehold Valuation Tribunal.
It is vital to understand that there is no exact science in assessing the premium and therefore careful consideration should be given to the whole range of the figures provided to avoid any unpleasant surprises.
Added to the premium will be the tenant’s own costs of the lease extension application and the reasonable costs of the landlord (including legal and valuation costs) but not costs incurred by the landlord in respect of proceedings before the Leasehold Valuation Tribunal.
The date of service of the tenant’s notice will fix the date of the valuation that all parties will then work from, irrespective of how long the process takes from that point.
d) Ensuring finance is in place:
You must ensure that all appropriate funding is in place before embarking on the application process. Not only will you need to budget for the premium and your own professional fees (legal and surveyor/valuer), you must take into account responsibility for payment of the landlord’s costs. These will be payable whether or not the lease extension completes.
Additionally, it is important to note that the landlord is entitled to require payment of a deposit at any time after receipt of the tenant’s notice. This can be up to 10% of the premium put forward in the tenant’s notice, or £250, whichever is greater.
e) Drafting, preparing and serving the tenant’s notice:
It goes without saying that the tenant’s notice must comply with the statutory requirements and contain no errors or inaccuracies. The notice must also be served on the competent landlord (with copies to other landlords if appropriate). A failure to do this could lead to the notice being deemed invalid.
What happens after serving the tenant’s notice?
Registering the tenant’s notice:
It is possible to protect a tenant by registering the notice at the Land Registry by way of a Class C(iv) Land Charge (unregistered land) or by way of a unilateral notice (registered land). This gives any prospective purchaser of the competent landlord’s interest notice of the application for the lease extension. The new purchaser will be subject to that application.
Dealing with the landlord’s response:
The tenant has to be prepared for any challenge by the landlord in respect of the validity of the tenant’s notice. Further, the landlord is entitled to require the tenant to provide evidence of his ownership of the property – the landlord can request this during the period of 21 days from the date of service of the tenant’s notice. If it is requested, the tenant must provide the information within 21 days, failing which the landlord can serve a default notice and make application to the court for an order for compliance.
The landlord (and any person authorised to act on his behalf) has a right of access to the flat for the purposes of enabling that landlord to obtain, in connection with the tenant’s notice, a valuation of his interest in the flat. This right is exercisable at any reasonable time and on giving not less than 3 days’ notice to the tenant.
The landlord’s counter-notice:
The landlord must serve a counter-notice by the date specified in the tenant’s notice. The counter-notice must:
- admit the tenant has the right to acquire a new lease; or
- not admit the tenant’s right to a new lease and specify reasons for that; or
- state that the landlord intends to redevelop any premises in which the flat is contained (in which case a new lease may not be granted – please refer to “What about the other terms of the new lease?” above).
The counter-notice must also state which (if any) of the proposals contained in the tenant’s notice are accepted by the landlord and which (if any) are not. Where a proposal is not accepted, the landlord must specify a counter-proposal.
What happens after receipt of the landlord’s counter-notice?
In the event that agreement cannot be reached on the terms of the transaction, there is a statutory period for negotiation. This is a period of at least two months from the service of the counter-notice, but not more than six months. If at the end of the initial two month negotiation period the terms remain in dispute, either the landlord or the tenant may make an application to the Leasehold Valuation Tribunal to determine the issues.
Following agreement between the parties or a determination by the Leasehold Valuation Tribunal, the required documentation will be drafted and finalised and the new lease completed with payment of the premium and other costs due as part of the transaction.
What happens if the landlord fails to serve a counter-notice?
If the landlord does not serve a counter-notice within the require timeframe, the tenant may make an application to the court for a Vesting Order. This is where the court, if satisfied that the tenant qualifies and notice was served, will make an order determining the terms of the new lease in the landlord’s default. This will normally be on the terms set out in the tenant’s notice.
The application for a Vesting Order must be made no later than six months of the date that the counter-notice should have been given.
There are many factors involved in making an application for a lease extension through the statutory process, which can be complicated. We can guide you through the process and should you wish to discuss matters in further detail, please do not hesitate to contact us.