Negotiating Lease Extension - How to pay your freeholder less
- Any reasonable negotiation should be based on a RICS valuation.
- You can begin negotiating before you serve section 42.
- If your freeholder refuses to agree to a lease extension premium you may be able to go to tribunal.
Lease extension cost negotiations can be complicated, however, in reality, they are like any negotiation; one party wants more for less and the other less for more.
The difference with negotiating to pay a lease extension premium is that there is a set formula to work out what you should pay to extend your lease. Often challenges arise when the:
- Leaseholder serves a Section 42 Notice without an RICS valuation.
- Freeholders serve a Section 45 Notice without an RICS valuation.
- Property price is under or overvalued in the leasehold valuation report.
- Offers aren't reflective of the actual lease extension premium payable.
- The parties act unreasonably.
This article explains how to negotiate a lease extension with your freeholder successfully, provides you with a downloadable lease extension letter to the freeholder, and reduces the need to go to the Tribunal.
What is the lease premium?
The lease premium is a one-time non-refundable sum paid by a tenant to the owner or landlord for leasehold interest in a property. If the lease is less than 50 years, it's classified as a short-term lease.
At what point do you negotiate a lease extension premium?
Most negotiations start after the freeholder responds to the Section 42 Tenant Notice with their Section 45 Counter Notice declining the premium and putting forward their premium.
There can however be negotiations at an earlier stage in the lease extension process, before the new leaseholder serves the Section 42 Notice, which can reduce the need for negotiations at the Section 45 Notice stage.
Get an online quote to see how we can save you hundreds of pounds on your valuation costs, or arrange a free initial consultation with a member of our team:
What is the 2-year lease extension rule?
If you have owned a property for at least two years, you are legally allowed to negotiate a 90-year extension to your current lease from your freeholder.
The Leasehold and Freehold Reform Bill is now with the House of Lords to improve the lease extension term from 90 years to 990 years and remove the two-year condition to qualify for the entitlement.
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Get a RICS Lease Extension Valuation
Most specialist RICS surveyors offer a best and worst-case scenario for what you should offer the freeholder to extend the lease, using the statutory route within the Leasehold Reform Act.
We have local RICS surveyors who specialise in lease extensions. Call to get a quote at 0333 344 3234 (local call charges apply).
How do you negotiate a lease extension using an online calculator?
Lease extension calculators indicate what premium to budget for. However, this won't be accepted by your freeholder as evidence of the actual premium to pay because the lease extension calculator is based on your input.
The freeholder will argue you aren't qualified to value the property nor can you confirm the term rate, Reversionary Rate and Relativity. A qualified RICS surveyor trained to do a full valuation and provide these answers is what the freeholder would expect to see.
If you do use an online calculator to value the premium, be prepared for the extra legal fees, costs in negotiation and, potentially, the need to then pay for a valuation to properly evidence your offer.
How much value does a lease extension add to a property?
If your lease is considered a short lease (less than 50 years), the assumption is that the growth in property value will be more significant than the cost of actually doing the extension.
Typically, the value might rise between 10-15 per cent if the lease is extended into a long lease (over 100 years).
Free initial leasehold advice
- Lease extension
- Purchasing the leasehold, freehold or share of freehold
- Selling a leasehold property with a short lease
- Extending the lease at the same time as you sell
- RICS Lease Extension Valuation or L2 Homebuyers Survey
- Serving of the section 42 notice, or section 13 notice on the freeholder
- Negotiation with the freeholder (with the support of your RICS valuer)
- Completion of the legal work, including deed of variation
- Application to Tribunal to determine the premium
- Vesting order for absent landlords
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Contact your freeholder to start the lease extension process
This is a critical step and one often missed. Suppose you have direct contact with your freeholder or management company, under the Leasehold Reform Act, you have the legal right to inform them of your intention to formally extend your lease.
At this stage, there are no costs involved as you aren't paying a solicitor or surveyor to do this for you and there is no downside because the land registry freeholder could:
- Ignore you, so you can move forward with serving the Section 42 Notice through your solicitor.
- Disagree and put forward their premium, giving you insight into their expectations so you can compare them with your valuation.
- Agrees with your offer and asks for you to move forward with the formal lease extension.
You may struggle to agree to a pre-section 42 notice premium if your freeholder is the council or has a large management company as they normally only respond to a formal notice to extend.
Not sure how to negotiate your lease extension? Don't worry, download our free template letter which gets you off to the right start in your lease negotiations with your landlord or freeholder
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Serve Section 42 Tenant Notice
Based on the response from your freeholder to your initial communications, you can now instruct your solicitor to serve the section 42 notice on the freeholder.
You will need to choose the amount to include in the S.42 Offer, however here are a few things to think about:
- Starting too low - it would be great to get the premium for less money, however starting too low could lead the freeholder to put in a high offer or they may choose to obtain their valuation (at your expense). With a reasonable offer, a freeholder may choose not to get their valuation and agree to your offer.
- Starting too high - you may miss an opportunity to get a more reasonable premium if you start at the highest level your surveyor calculates the premium should be.
- What was the freeholder's response to your first contact? - the objective of making contact with the freeholder before you serve a section 42 notice is so that you can get them to agree to an extension in principle, based on the premium you put forward. The freeholder can, of course, change their minds further down the line, but this is fairly unlikely.
The best advice is to put forward a reasonable offer somewhere in the likely range of just below the middle between the best and the worst premium within your surveyors' valuation. Your lease extension solicitor would be able to help with this.
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Receive Section 45 Counter Notice
This is where you'll see if the freeholder has accepted your offer or not. If the freeholder doesn't accept your offer they will propose a revised counter-offer.
Can a freeholder refuse a lease extension?
The freeholder or landlord cannot refuse a formal lease extension as long as you are eligible. The main points for eligibility are having lived there for the past 2 years and for the original lease to have been over 21 years in term.
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Negotiating the lease extension with the freeholder or accepting the counter-offer?
If the freeholder does not agree with your premium offered then you need to decide to either:
- Accept the Freeholder's Counter-Offer - it may well be that the freeholder's counter-offer is not too dissimilar to your original offer and you are happy to proceed or you feel the difference between your offer and the freeholder's offer does not merit spending additional money negotiating.
- Instruct your surveyor to negotiate - the negotiation should take place between your surveyor and the freeholder's surveyor to find the difference between the two valuations and put forward why they feel their valuation is correct. Can't agree on terms with your freeholder? You'll see below why there can be differences in the surveyor's reports. The negotiation cost is often charged hourly between £150 to £300 per hour. You should weigh the cost-benefit of negotiating, as 3 hours of negotiating could equal £1,000 and if the difference is only £1,500 then you could end up spending more money negotiating than the difference in premium.
Caragh is an excellent writer in her own right as well as an accomplished copy editor for both fiction and non-fiction books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey and mortgage related articles.
