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How to make the most of your leasehold property Blake Morgan's specialist in leasehold enfranchisement explains the complexities of the Section 42 Notice

Residential Investor

Close up of person signing a contract

When it comes to selling a property, everyone wants to make the most of what they own, whether it is by giving it a fresh lick of paint or sprucing up the garden. However, for residential tenants of long leases, there may be one further step they can take to improve the value of their property before going to market.

Lease length – why does it matter?

One of the key factors to be borne in mind when purchasing a leasehold property is how much longer the lease has left to run. Or putting it simply, how long until the keys must be handed back to the landlord.

It is easy to see how someone may be willing to pay more for a property where the lease has 200 or more years left to run, compared to a lease that has only 90 or less. For the latter, it is clear that it would be beneficial to increase the remaining length of the lease to make it a more attractive investment to potential buyers. Many buyers are hesitant to purchase a property where there are less than 85-90 years left to run on the lease. Additionally, mortgage lenders will often not lend on properties with less than 80 years unexpired.

From a valuation point of view, the “danger zone” for any lease is 80 years too. In crude terms, when a lease drops below 80 years, it becomes much more expensive to extend the term. The technical reason for this is that, at this point, an additional element is added into the valuation calculation, called marriage value.

Can a lease be extended voluntarily with the landlord?

It is certainly possible to extend a lease simply by agreement with the landlord. However, there is no certainty that a landlord will agree in the first place, and there is always the possibility that even if they do engage with the idea, it may never come to fruition. There is nothing that a tenant can to do to compel the landlord to sign on the dotted line.

What other options are there?

Fortunately, if a tenant has owned the property for at least two years (and provided all other criteria are met) they have a statutory right under the Leasehold Reform Housing and Urban Development Act 1993 (the 1993 Act) to essentially force the landlord to extend the lease. Think compulsory purchase!

A statutory lease extension adds an additional 90 years to the remaining term, and reduces the ground rent to a peppercorn (effectively nil). Both are positive selling points to a potential purchaser.

Who would handle the statutory process?

The legal framework is complex and the ramifications of not dealing with the process correctly can be detrimental. It is therefore highly recommended that a specialist leasehold enfranchisement solicitor is instructed to deal with the legal aspects. A specialist surveyor should also be instructed to provide valuation advice.

What is the first step?

The first step is for a valuation to be carried out by the specialist surveyor who will inspect and measure the property (unless the valuation can be done on a ‘desktop’ basis), study the lease, research comparable sales and then produce a lease extension calculation and report. This will confirm the likely premium payable to the landlord (to compensate them for their various losses – including marriage value if the lease has less than 80 years left to run), together with a suggested offer with which to start negotiations.

How is the claim initiated?

Once the valuation has been carried out, it’s the solicitor’s job to investigate the title structure and draft the required notice, fondly known as a “Section 42 Notice”. Amongst other things, this needs include a proposed premium, and be served on the landlord and any other intermediate landlords and/or any third parties to the lease – it is crucial that this is done correctly, as is registration of a unilateral notice at the Land Registry to protect the claim.

On receipt of the Section 42 Notice, the landlord is likely to ask for evidence of title and payment of the statutory deposit, being 10% of the premium proposed or £250 (whichever is the greater).

What next?

The Section 42 Notice needs to contain a date by which the landlord must respond – at least two months from receipt of the Section 42 Notice.

The landlord’s response must be provided in the form of a Counter Notice. Again, amongst other things, this must confirm whether or not the tenant’s proposals are accepted, and if not, counter proposals must be given. This sets the goal posts for the negotiations on valuation and any other proposals put forth by the parties.

How is the lease extension finalised?

Once the premium has been agreed between the surveyors, and the new lease is agreed between the solicitors, completion will take place in much the same way as a usual purchase – including the payment of Stamp Duty Land Tax (if applicable). Thereafter, the lease extension is registered at the Land Registry, in place of the previous lease.

Residential Investor

About Caroline Wild

Caroline Wild

Caroline Wild is a Legal Director at Blake Morgan. Caroline works as part of the Residential property team in London. As an expert in leasehold enfranchisement, she heads the team’s specialism in this niche area of law. She was Finalist Young Professional of the Year at the Enfranchisement and Right to Manage Awards 2014.

Articles by Caroline Wild

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