Outline of the Residential Lease Extension Process

Under the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”), a residential tenant may have the right to extend the long lease of their property by an additional 90 years. Although this is commonly referred to as a lease extension, the process actually involves a new lease being entered into in place of the existing lease. This article briefly outlines the key elements of the lease extension process.

Eligibility

In order to bring a claim for a lease extension, a tenant must satisfy the eligibility criteria set out in the Act the statutory procedure. In particular, a tenant must have been registered at the Land Registry as the owner of their property for at least two years and their lease must qualify as a long lease under the Act, for example be for a term of over 21 years.

Valuation

Before starting the process, a tenant will need to determine the likely premium payable to the landlord in consideration for the lease extension. This can be a complex procedure that should be carried out with the assistance of an experienced valuer.

It is important that the tenant establishes a realistic premium to quote in their initial notice to ensure the notice is not deemed invalid.

The Tenant’s S42 Notice

To begin the lease extension process, the tenant must serve an initial notice on the ‘competent landlord’ in line with the requirements set out under section 42 of the Act. A ‘competent landlord’ may either be the freeholder or the tenant’s direct landlord of the building if that party holds an interest with sufficient duration to grant the tenant a new lease with an additional 90 years.

The s42 notice must set out sufficient information to identify the tenant, the property and the existing lease. It must also state the proposed premium, the terms for the extended lease and specify who is acting for the tenant.

The s42 notice must also set out a date by which the landlord’s counter notice has to be served, which must be at least two months after the s42 notice is served.

Serving the s42 notice triggers the statutory procedure under the Act. As such, there are important consequences that a tenant should consider carefully before doing so, including the entitlement of the landlord to request that a 10% deposit be paid and the tenant becoming liable to pay certain costs incurred by the landlord.

Once a s42 notice has been served, a tenant should take steps to protect the notice by way of registration of a notice against the competent landlord’s title (and that of any intermediate landlord) at the Land Registry (or a Class C(iv) Land Charge if the title is unregistered). If a tenant fails to do so, a purchaser of the landlord’s title would not be bound by the s42 notice and the tenant would need to start the procedure over again.

The Landlord’s S45 Counter-Notice

Once a tenant has served a s42 notice, the landlord must serve its counter-notice by the date specified in the s42 notice in a form which complies with section 45 of the Act. Should a landlord fail to do so, a tenant will be entitled to apply to Court for an order granting it a new lease on the terms proposed by the tenant in its s42 notice.

The s45 notice must either:

a) Admit the tenant’s claim if the tenant qualifies for a lease extension;

b) Not admit the tenant’s claim if the landlord does not think the tenant satisfies the qualifying criteria to be eligible for a lease extension; or

c) Refuse to grant a new lease on the grounds of redevelopment.

If the landlord does not admit the claim or refuses to grant a new lease on the grounds of redevelopment, the onus is on the landlord to apply to the court for an order that a new lease should not be granted.

Negotiating the New Lease and Premium

If the landlord admits the claim, it is then for the landlord and tenant (with the assistance of their professional advisers) to negotiate the terms of the new lease and the premium payable, albeit the Act stipulates that the new lease must be granted at a peppercorn rent and for a term of 90 years plus the remainder of the term of the existing lease.

Although the parties are free to agree changes to the terms of the existing lease, in practice, the lease is usually granted on the same terms, save for minor modifications and statutory amendments. The lease extension process can present a good opportunity to replace old, out of date terms with a modern form of lease which can make management of the building easier and/or provide better security for a mortgage.

Ultimately however, if the parties cannot agree new terms by consent, the ability for one party to insist on changes to the existing lease is generally quite limited under the Act.

In most cases it is not the terms of the new lease that are controversial but the amount of the premium to be paid to the landlord, with such matters usually negotiated between each party’s appointed valuer.

Timeframes for Agreeing and Completing the New Lease

The Act sets out certain timeframes for agreeing the ‘terms of acquisition’ and completing the new lease. The terms of acquisition are essentially the key terms on which the new lease will be granted, including the amount of the premium.

If the terms of acquisition cannot be agreed, either the landlord or the tenant can apply to the First Tier Tribunal for a determination of any terms in dispute. However, the application must be made not less than two months and not more than six months after the service of the landlord’s s45 counter-notice.

If the terms of acquisition are not agreed or an application to the Tribunal has not been made by the date six months after the service of the s45 counter-notice, the tenant's claim for a lease extension will automatically be deemed withdrawn.

Once the terms of acquisition have been agreed, the Act sets out a procedure and timeframe for agreeing the form of lease and stipulates that the new lease must be completed within two months, failing which either party can apply to the County Court requiring the other party to perform its obligations under the s42 notice or be discharged from its obligations under the new lease. Any such application must be made not less than two months and not more than four months after the terms of acquisition, failing which the tenant's claim for a lease extension will again automatically be deemed withdrawn.

If a tenant’s application is withdrawn (whether intentionally or deemed under the Act as a result of failure to meet a deadline), the tenant is prohibited from making a further application for a new lease for a period of 12 months, as a consequence of which the amount of premium payable on any future application is likely to increase. As such, it is vitally important that the parties to the lease extension process, but in particular tenants, are aware of, and comply with, the various statutory deadlines under the Act.

Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.

For further information, please contact Kenny Friday or Darran Smith