Lease extension freeholder costs reduced from £11,702.22 to £2,411.82 by Tribunal

In this post, we examine a real example of a freeholder in Peacehaven, East Sussex, seeking extremely high lease extension costs from leaseholders, and how Ricky Coleman, Solicitor, and writer at Peppercorn Law, was able to drastically reduce the costs of the lease extension.

Case study in brief

The leaseholders of a flat in Sussex held the flat on a lease with less than 80 years remaining. They wished to extend the lease to protect their property value. The flat owner attempted a voluntary lease extension deal but progress was slow (we talk about the risks of informal lease extensions in this guidance note), and so a s.42 notice was served to get things moving.

The freehold company, Balcombe Court Peacehaven Limited, served a counter notice however allegations over alleged historic alterations then become embedded in the lease extension claim. Finally, the new lease terms were agreed only for the leaseholders to find that the freehold company was demanding over £11,000 in legal costs, valuation costs and administration fees, on top of the premium for the lease extension itself. The freeholders would simply not complete unless these quite incredible costs were paid.

The leaseholders had no option but to apply to the FTT for an assessment of the costs claimed by the freeholder and once the evidence of both sides had been considered, the decision was made to disallow the majority of the costs claimed.

Tribunal ruling

Tribunal held that legal fees of £2000 plus VAT were payable, along with valuation fees of £780. A massive reduction in the freeholders claimed legal and valuation costs. The full decision is available here:

if you'd like to know how we succeeded in challenging the costs, read on.

The s.42 notice

The leaseholder served a s.42 notice on 17 August 2022 for the property in Peacehaven, East Sussex, proposing a premium for the new lease, for 90 additional years and the reduction of the ground rent to a peppercorn.

In the usual course of things, we expect a counter notice, negotiations over the new lease price and eventually, completion and registration at the Land Registry. That was not to be the case here, as the freeholders valuer inspected the property as part of the freeholders valuation, but took the opportunity to allege that unauthorised alterations had been made to the flat, seemingly with no evidence of this other than a hunch. This is a common freeholder tactic which is sadly seen across the industry in leasehold hotspots such as Brighton.

Freeholders can do this to gain leverage in negotiations an will often agree to 'waive' a breach on the condition of an expensive retrospective licence to alter and in some cases, a higher premium being paid for the new lease.

In real terms for the leaseholder, the effect of this is to turn a straight forward lease extension under the Leasehold Reform Act into a full blown breach of lease case, which the flat owner then has to defend at substantial cost.

To provide context, the layout of the flat hadn't changed since the leaseholder had bought the flat in 2013. Further, there was (and has never been) evidence the layout had changed even before 2013. This is a total nightmare for flat owners who are then threatened with forfeiture for something they didn't do. All the while the statutory timelines for the section 42 notice continue to apply pressure to resolve things.

Section 45 notice

A s.45 counter notice was received on 24 March 2022 from commonhold and leasehold experts, solicitors for the freeholder. The counter notice made proposals for the premium, as is expected, however it also enclosed a draft new lease with 23 amendments to the lease. Yes 23!

This included a clause making interest of 10% payable on late payments, increased freeholder legal costs recovery, restrictions on subletting, restrictions on the use of the parking space, and lots more.

Taken with the breach of lease allegations, it was becoming apparent that the matter was not going to be straight forward. The leaseholders were advised by their Eastbourne based solicitors that a leasehold specialist with experience of property litigation would be needed, as this was likely to involve the County Court or Tribunal. Ricky Coleman, a leasehold solicitor based in Brighton was suggested, and he took over the case, making clear that freeholder was not entitled to make such significant changes to the lease and that the breach of lease claims were simply not supported by evidence.

It is worth noting that this is not a normal way to reply to a section 42 notice, but this case study is written to forewarn leaseholders of the risks of being particularly unlucky. and equip them with the tools to handle this style of tactic by freeholders and their legal advisors.

Breach of lease allegations

The lease extension claim slowed considerably whilst the parties put forward their points of view on whether a small opening to a kitchen had been created by removing a door, if (as the leaseholders argued) the flat was actually in its original form though it was accepted this differed from some of the other flats in the building. The flat owner argued that even if a change had been made to the flat, the landlord and its managing agent had been aware of the layout when visiting the flat on a number of occasions over the years.

Completion statement - how much?!

The matter was resolved through negotiation, with some concessions by the leaseholders who simply wanted to conclude the process and avoid further legal bills and stress.

It was at this stage that the freeholder provided a statement including the agreed premium along with the eye watering legal costs bill of £11,702.22, which we would argue is around 3-4 times what we tend to see for a process of this nature.

How much does it cost to extend a lease?

The freeholders legal costs tend to be around £1250-£1850 plus VAT, depending on the solicitor used, and valuation fees of around £600 plus VAT. There is more guidance on the typical costs of the process here.

In short, the costs in this case were so far from the usual acceptable level that the leaseholder had no option but to issue an application to the First-tier Tribunal to challenge the landlords recoverable costs under s.60 of the Leasehold Reform Housing and Urban Development Act 1993.

How to challenge the landlords costs of a lease extension

The form required, Leasehold 8, form can be found on the Property Tribunal website here.

To challenge costs, the flat owner must:

1. complete form leasehold 8, confirming the costs claimed by the freeholder

2. email the form to the FTT along with any completion statement received that details the fees

3. pay a fee of £110 for the Tribunal to issue the application

4. comply with Tribunal Directions, typically to set out why the costs are being challenged and what would be accepted by the leaseholder. The freeholder then has a chance to respond

5. the decision is then usually made on papers, without an in person hearing

   
   

Despite the stress of finding themselves in this situation, the leaseholders in this case were able to follow this process and obtain an independent ruling on what the freeholder was able to claim.

An application was made to the Tribunal which held that:

(i) the lease extension fees of £3025 were too high and should be reduced to £2400

(i) the legal fees relating to the 'breach of lease' of £4981 plus VAT where simply not recoverable under s.60 of the Act

(iii) the £1920 in administration fees claimed by the freehold company was also not payable under the Act at all

The determination brought the freeholders total recoverable costs to £3191.82. This is a far more common level of landlords costs.

The Tribunal decision

In the Property Tribunal's own words:

38.               As a result, the Tribunal considers that any ongoing breaches are not relevant to the service of a section 42 notice or the grant of a new lease pursuant to it. A landlord is not entitled to hold up the process whilst any purported breaches are sorted and is prevented from launching any proceedings for forfeiture whilst the claim for a new lease is ongoing. The only exception is where a tenant has served a section 42 notice to prevent such forfeiture proceedings. If a landlord has knowledge of a breach it is entitled to protect itself by suitable wording in the new lease.

39. Applying that conclusion to this case, the Respondent was not entitled to pursue the claim for the breach of covenant as part of the 1993 Act process, looking to preserve its section 146 rights. Those rights were suspended in any event on the service by the Applicants of the section 42 notice

The approach taken by the freeholder was therefore not correct in this case and ultimately, it has cost the resident's owned freehold company a lot of money in fees that (thankfully) cannot be recovered from the leaseholders who were simply trying to extend their lease term.

It will unfortunately mean that the costs incurred in the misadventures of the directors of the residents management company are now passed to other residents through the service charge; in reality therefore no one wins in this scenario.

Leasehold reforms and landlords costs

Note that in rules being proposed under the leasehold reforms, landlords costs will largely not be recoverable and so it is hoped that the new rules, once enacted, will put an end to these sorts of tactics. If a freeholder is genuinely concerned about a potential breach, it is down to the freeholder to use the proper process to investigate and if necessary, enforce the breach, rather than wait until a s..42 notice is served and then attempt to shoehorn the costs of this misadventure onto the leaseholder.