Lease extension on completion - Assign the benefit to the buyer

by:

Updated:

26/08/2020

Read by:

12,092

6 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

You can assign the benefit to a buyer to extend a lease on completion. By doing this the buyer is allowed to carry on the lease extension process after completion without having to wait the statutory 2 years. Whilst this saves the buyer time, it does pass on risks such as:

Who pays the premium? the buyer will need to pay the premium after completion.
Who pays for the survey? the seller needs to get a valuation to confirm the premium to include in the section 42 notice.
Who pays for the legal fees? the seller is liable fro the section 42 notice, the buyer for finalising the lease extension and the buyer will also have to pay the freeholder's fees.

Without ironing out these points with the seller a lease extension on completion can be costly for a buyer. No matter what, the buyer should never complete the purchase until they have agreed a premium with the freeholder, or at least have a buffer in the sale price in case the premium in the section 42 notice is too low.

All too often the seller and buyer don't factor in that the freeholder will negotiate the premium upward after completion which could leave the buyer out of pocket. Here is a useful article on - Risks of Buying a leasehold property with a short lease.

If the lease is short (under 80 years) and the buyer is getting a mortgage then they will need to check with the mortgage lender to confirm if they can complete and then extend the lease - some mortgage lenders won't agree to this.

We offer the complete lease extension service with local RICS valuers and specialist lease extension solicitors. Call now to get a quote and see how we can help you - 0333 344 3234.

The buyer has no right to extend the lease

The buyer has no legal right to extend the lease prior to completion so is reliant on the seller to complete the section 42 notice and deed of assignment to grant them the legal right to extend the lease after completion.

4 stages to a lease extension on completion?

1

Agree the terms

The buyer and the seller need to agree to who is paying for the lease extension. This will include:

Premium
Lease extension costs

What are the lease extension costs after completion

The Section 42 Notice will have already been paid for which leave the following costs to be paid:

Premium

You need a RICS surveyor to value the premium payable to the freeholder to extend the lease. The cost can be considerable so you need to agree with the seller the premium they will include in the section 42 notice - it is this amount the freeholder will agree or dispute in their section 45 counter notice.

Surveyor Costs

Who is paying for the surveyor to confirm the premium and who is paying for the freeholder's surveyor? The freeholder has the legal right to ask for their surveyor costs to be paid for by the buyer after completion.

Solicitor Costs

The buyer will be liable for the legal costs to finalise the lease extension and again the freeholder's reasonable legal fees. There are also the costs for the seller to serve the section 42 notice and the deed of assignment.

2

Seller serves notice

The buyer can't do this so the seller needs to serve the Section 42 Notice on the freeholder - a solicitor needs to do this to ensure the notice is correctly drafted and served.

The solicitor will need to:

prepare the deed of assignment of the s42 notice;
prepare the related special conditions to be inserted in the sale contract;
serve the Section 42 Notice on the freeholder and complete the deed assignment (assigning the right to extend to the buyer after completion);
10% of the premium in the S.42 notice is paid to the solicitor to be held on account;
register at Land Registry.

Once ready the completion can take place as normal - see what happens on the day of completion.

3

Section 45 Counter Notice and Negotiations

The freeholder will serve a Section 45 Counter Notice which confirm what they agree and disagree with your offer. It will state:

agree to all terms (premium and right to extend);
not agree to any terms; or most commonly
agree to right to extend but not the premium offered.

Where the freeholder disagrees with the premium the freeholder puts forward a counter offer. Read our guide here on - How to successfully negotiate your premium with your freeholder

4

Completion

Once terms and premium have been agreed with the freeholder, the parties have 4 months to complete the following:

1

Freeholder drafts deed of variation and submits to leaseholder's solicitor

2

(if mortgage) Leaseholder's solicitor drafts a deed of substituted security for the mortgage lender

3

Completion takes place - Leaseholder pays balance of the premium premium and legal costs

3

Register deed of variation at the Land Registry - it can take upward of 6 months to be registered at the Land Registry

How lease extension on completion works, from SAM Conveyancing. A bare room contains cardboard moving boxes, house plants and bubble wrapped furniture.

Risks of a Lease extension on completion

Section 42 Incorrectly Served

If this happens then the buyer will have to wait 2 years before they have the legal right to extend. An informal could be negotiated but these terms will be unfavourable. To avoid this make sure you have a specialist lease extension solicitor to draft and serve the section 42 notice along with the deed of assignment. We have a solicitor who handles this so call now to get a quote on 0333 344 3234 (local call rate).

Premium higher than budgeted

If the premium and costs end up being more than the discount the buyer negotiated with the seller then they are out of pocket. This can be avoided by not assigning the lease extension and completing the lease extension on the day the buyer completes their purchase. It makes the process longer but less risk is involved for the buyer.

What happens at an auction?

Short leased properties are often sold at auction with the section 42 notice served. If you are planning on buying one of these properties then:

1

Get a premium valuation we had a case recently where the section 42 notice stated £16,000 within the premium, the client bought it being able to afford that amount and then found out after the freeholder's counter notice the premium was in fact closer to £70,000. Just because it states a figure in the S.42 notice doesn't mean this is what the Freeholder will agree to.

2

Use a lease Extension Solicitor to review the S.42 notice, ensure the rights are correctly transferred and to then finalise the lease extension after completion. This is a must!

Absent landlord

Just because the notice was served correctly doesn't mean that the landlord was there to receive it. The buyer could be left trying to find an absent landlord or going to court to obtain a vesting order. To avoid this risk the buyer should ensure there is a dialogue between the seller and freeholder.

Mortgage lender won't agree

As a rule of thumb, mortgage lenders won't lend on a property where the unexpired lease term is less than 30 to 40 years after the mortgage term has expired. For example if the buyer has a 40 year mortgage and the lease term has 79 years left to run, then after the mortgage term the lease will only have 39 years to run and the mortgage lender won't agree on this basis. To avoid this complete the lease extension on the day of completion.