Previous attempts to resolve this situation through legislation (Leasehold Reform Act 1967 and the Landlord and Tenant Act 1987) having proved unsuccessful, prior to the entry into force of the Leasehold Reform, Housing and Urban Development Act 1993 (“LRHUDA 1993”) leaseholders (so tenants) with insufficient terms left on their leases had little choice but to enter into negotiation with the freeholder (their landlord) to agree an “extension” of the Lease (technically speaking a surrender and re-grant for a new term but the point is not material and I will refer to “extension”).
As the price of agreement to the “extension” the freeholder/landlord would usually seek to impose:
This method of resolving matters with the freeholder/landlord is referred to as “agreement by private treaty” and is still available and – notwithstanding what follows – still used surprisingly often (see below).
LHRUDA 1993 contained provision under which a “qualifying tenant” (basically a leaseholder who had owned their property for over two years) was entitled to extend the term of their Lease by a further 90 years and to extinguish their ground rent.
The process is initiated by service of a notice (a “section 42 Notice”).
The landlord/freeholder will still be entitled to a premium – which will be based on the diminution in value of its freehold as a result of the extension of the Lease (and the reduction in ground rent). The s.42 Notice will contain the tenant’s first offer with respect to that premium (advice should normally be taken from a surveyor to ensure that the initial offer is pitched at the correct level).
The landlord will usually then serve a counter notice (within the statutory period of two months) and require payment of the statutory deposit (10% of the premium quoted in the Notice). This must be paid within 14 days to the Landlord’s solicitor to be held as stakeholder.
From here the statutory mechanism will run on (negotiation period followed, if necessary, by Tribunal determination).
There are two reasons why all of this is often important:
Whilst it may still, in the end, make commercial sense to do a private deal with the landlord, the tenant’s hand is very much strengthened by the existence of the LRHUDA 1993 mechanism: in particular its provision for the extinction of the ground rent.
There are increasing reports of unfavourable ground rent provisions in privately agreed extensions – which are usually stored up in the form of unfavourable rent review provisions in the “small print” at the end of the lease. These can lead to a massive increase in ground rent over the course of the lease.
If you wish to avoid difficulties of this type contact the Conveyancing Department at Barrett & Co – in particular Mr Alan Warnes who is our lease extension specialist.