Can't agree lease extension terms with your freeholder? What happens next?
28/10/2019
5
11 min read
The Leasehold and Freehold Reform Act 2024 was passed on the 24th May 2024, but is not yet in effect and the date for this is not yet clear. We will update our content as and when the finalised legislation is published. Read more - Expected changes
If you can't agree lease extension terms with your freeholder using the formal statutory route, you shouldn't be disheartened as you have many advantages because of the related law. So what should you do next?
If you're taking the formal/statutory route to extending the lease on your flat, you're at an advantage over taking the informal route, because the process follows the statutory process set out within the Leasehold Reform, Housing and Urban Development Act 1993 which means that any dispute can be resolved whether through the solicitor, surveyor or finally at the First-Tier Tribunal (FTT) (previously called the Leasehold Valuation Tribunal - LVT, still called this in Wales) within the prescribed time limits.
The statutory timings are:
- The freeholder must serve their s45 Counter Notice on or before the date stated in part 7 of the Section 42 Notice
- The leaseholder and freeholder have 2 months after the date stated in part 10 of the Section 45 Counter-Notice to negotiate the terms and premium
- The leaseholder has 6 months after the date stated in part 10 of the Section 45 Counter-Notice to make an application to the Tribunal to determine the terms/premium of the lease extension
We explain in further details how long the formal lease extension process takes in our article - How long does it take to extend a lease?.
Click here or scroll down to see our diagram which illustrates this part of the process as part of the path to the Tribunal.
Can't locate your freeholder/landlord to serve your Section 42 on?
When you have an absentee freeholder/landlord whom no-one can locate (or, for example, a receiver who is administering their assets) you can apply to a court for a Vesting Order (click to find out more regarding the absentee freeholder situation) with no time restriction.
The court decides what your lease extension premium will be in the place of the absent freeholder, taking your Section 42 notice and RICS leasehold valuation as evidence and it can itself refer to the First-tier Tribunal (Property Chamber) for further guidance.
Section 42 Notice reply time limit - yes, no or negotiate further
The Section 42 Notice has a date (normally 2 months and one day after the service of your notice) by which your landlord has to have replied your claim to extend your lease with what's known as a Section 45 Counter-Notice.
By the end of this time period, potentially 5 things might happen:
- 1
Landlord agrees to your lease extension claim and premium/terms and the lease extension conveyancing can then progress to completion.
- 2
Landlord agrees to your lease extension claim but disagrees with your terms, presenting you with an alternative premium as the basis for further negotiation.
- 3
Landlord makes no response to your notice.
- 4
Landlord denies your lease extension claim and has to go to county court to determine if their reasons are lawful (generally this only happens if there's a fault with your Section 42 Notice, which there should never be if you've taken appropriate advice in drafting it).
- 5
Landlord claims the right of redevelopment - they can refuse to grant the new lease if they can prove to a court that they intend to demolish and redevelop the building. This only applies to applications where the remaining period of the lease is less than five years from the date when the notice was served.
This article examines what happens when either the second or the third of the possibilities above happens (the first means success - excellent news! - and 4 and 5 should only occur rarely), i.e. where your landlord has received your notice but hasn't agreed or appears to have ignored it. It looks at the following and includes related time frames:
- 1
- 2
- 3
Can't agree your lease extension premium with freeholder? No response to your S42 Notice?
Our expert property lawyers and RICS surveyors can help you resolve your formal lease extension negotiations, from expert lease extension valuer representation to lease extension conveyancing to taking a case to the First-tier Property Tribunal if required. Great rates.
* Lease Extension Solicitors – RICS Lease Extension Valuers – Experts in First-tier Property Tribunal cases/Vesting Order cases
- 1
What should you do if your landlord sends you an alternative (lower) premium offer?
Under the Leasehold Reform, Housing and Urban Development Act 1993 - Section 48 Applications where terms in dispute or failure to enter into new lease, it states:
"Where the landlord has given the tenant:
- a counter-notice under section 45 which complies with the requirement set out in subsection (2)(a) of that section, or
- a further counter-notice required by or by virtue of section 46(4) or section 47(4) or (5), but any of the terms of acquisition remain in dispute at the end of the period of two months beginning with the date when the counter-notice or further counter-notice was so given, a leasehold valuation tribunal may, on the application of either the tenant or the landlord, determine the matters in dispute."
The law allows for the leaseholder and freeholder to negotiate between each other for the first 2 months after the section 45 notice has been served. During this time the leaseholder can either negotiate informally or instruct their surveyor to negotiate with the freeholder's surveyor. The latter allows the two professionals to find a middle ground, however your surveyor will charge an hourly rate for this service.
After the 2 months has elapsed and if you have yet to agree on the terms of the new lease, then the leaseholder can make an application to the Tribunal (FTT) to let them determine the terms.
What financial value is worth negotiating over?
This is a key question as the whole lease extension process always costs considerable sums.
You should keep things in proportion. Let's take 3 scenarios, each where you've proposed a £20,000 premium in your Section 42 Notice.
- Your landlord counters with an offer of £30,000, all things being equal it's worth bargaining via surveyor negotiation an further because even if you end up having to take the 'nuclear option' in cost terms of having to make an application to the tribunal, you may still gain by a few £1,000s.
- Your landlord counters with an offer of £21,200 (it could happen!)
You should bear in mind that you'll get what you want for only £200 more than you originally bargained for, but more importantly, you won't have to pay professional fees for further negotiation. - Your landlord counters with an offer of £21,800
This may well be worth paying a professional RICS valuer to negotiate further on your behalf, but bear in mind their hourly rates (which may be e.g. £200/hour) so you should set a cap on negotiating time. An additional positive here is that your landlord has to pay themselves for their own side RICS valuer negotiation - this may well make them more likely to 'move closer' to your offer.
Hopefully you'll have managed to agree the premium you'll pay and the terms with your freeholder during this initial 2-month period, either through informal approaches or at arm's length via your appointed RICS lease extension valuer and your lease extension then goes to completion as referred to before.
But what if you can't agree the premium and terms, even though you've paid a professional RICS valuer to represent you and there's still a huge disparity between the figure you and your freeholder are prepared to accept?
- 2
What happens if you still can't agree after surveyor negotiations?
As we've seen above, the law allows for 6 months of negotiations between you and your freeholder after the date stated in part 10 of the Section 45 Counter Notice before your Section 45 claim becomes invalid. However, both you and your freeholder have the right to make an application to the First-tier Tribunal (Property Chamber) which makes a final binding ruling on the premium you'll have to pay and the terms of your lease extension (which will always result in a 90-year extension onto your existing lease term and a 'peppercorn' ground rent i.e. zero). You should look to start the process no later than month 5 after the counter notice date because you cannot make an application after 6 months.
It is very common to make an application to the Tribunal however very few cases are ever heard as they settle before the trial date because:
- Both your and your freeholder's total costs in the whole matter will rise considerably. You yourself will have to pay for:
- Solicitor representation regarding preparing your case for the tribunal, including investigating your case and title documentation etc. (this may exceed £1,000+
- Tribunal application fee (£100)
- Tribunal hearing fee (if required) (£200)
- Solicitor/barrister representation at the Tribunal (if required) (£300 - £500/hour excluding VAT)
- ID and Land Registry Fees (£45)
- Your freeholder will have to pay for their own legal representation regarding the tribunal. Even though this might work out to be less than your costs, it will be a serious 'step up' in terms of their costs. That in part is why many cases don't proceed as far as the actual hearing.
- Invariably it will be down to you whether to apply to the tribunal, it isn't normally a freeholder's decision to do so.
- Having a professional RICS valuation done in the first place is particularly important should you have to progress to this stage because any sort of online valuation or 'guestimate' is not likely to be taken seriously.
- Neither you nor your freeholder are awarded costs alongside the tribunal's final ruling: you must bear this in mind before considering taking the tribunal step.
- 3
What should you do if your landlord makes no Counter-Offer/ignores your notice?
Under the Leasehold Reform, Housing and Urban Development Act 1993 - Section 49 Applications where landlord fails to give counter-notice or further counter-notice, it states:
"Where the tenant’s notice has been given in accordance with section 42 but—
- the landlord has failed to give the tenant a counter-notice in accordance with section 45(1), or
- if required to give a further counter-notice to the tenant by or by virtue of section 46(4) or section 47(4) or (5), the landlord has failed to comply with that requirement, the court may, on the application of the tenant, make an order determining, in accordance with the proposals contained in the tenant’s notice, the terms of acquisition."
Should your landlord/freeholder not respond to your Section 42 Tenant's Notice by the date specified (normally 2 months and a day after your notice's date), in strict legal terms you are entitled to a lease extension for the premium you've stated in accordance with the terms of your notice.
In such cases, once the time limit has elapsed your solicitor then writes write to your freeholder's solicitor requesting the draft lease based on the Section 42 terms. If the freeholder's solicitor agrees with this, which is not likely, then they will issue the draft lease and the lease extension work can progress to completion.
However, if they don't respond or disagree with the request, you now have the right to apply to court for a Vesting Order and this must be done within 6 months of the date on which the Counter-Notice should have been received.
Click for a comprehensive article on Vesting Orders (failing to provide a Counter-Notice), however please note the following:
- Similar to the First-tier Tribunal (Property Chamber) mentioned above, you'll have considerable costs to pay:
- Solicitor fees for any further dealings with your landlord, preparing your case for court and finally completing and registering the new lease (£1,000s)
- Court Fee (c. £350)
- Barrister fees (can be anything from c. £800 to £1,000s depending on how contested the case is)
- ID fees, Priority and Bankruptcy Searches, Land Registry Fees (£50+)
- Vesting Order applications are generally successful however, and costs are awarded unlike the case for the First-tier Tribunal, which can be deducted from your premium. Often also the premium set will be less than the one you stated in your Section 42 Notice.
Frequently Asked Questions
If your freeholder denies your lease extension claim, the case will have to go to county court to see if their reasons are lawful. If they are, you will not be able to extend your lease.
If your freeholder does not respond, you may be able to apply for a vesting order. Or, if they make a counter offer that you disagree with, your case may go to tribunal. These eventualities are discussed in the article above.
Can't agree your lease extension premium with freeholder? No response to your S42 Notice?
Our expert property lawyers and RICS surveyors can help you resolve your formal lease extension negotiations, from expert lease extension valuer representation to lease extension conveyancing to taking a case to the First-tier Property Tribunal if required. Great rates.
* Lease Extension Solicitors – RICS Lease Extension Valuers – Experts in First-tier Property Tribunal cases/Vesting Order cases
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