When you're considering extending the lease on your property, there are several crucial aspects to take into account, one of which is the Section 42 Notice. This document is an integral part of the legal process, but for many leaseholders, its significance and the steps involved can be confusing. If you’re unsure about how this process works, don’t worry – this article will break it down for you, explaining everything you need to know about the Section 42 Notice, lease extensions, and what to expect throughout the process.
Section 42 Notices and how they work
The Section 42 Notice is a formal request that a leaseholder serves to their freeholder, asking for a statutory lease extension. It is a legal right to an additional 90 years being added to the lease and removal of the ground rent to a peppercorn.
This notice is issued under the Leasehold Reform, Housing and Urban Development Act 1993 and marks the start of the legal procedure for extending a lease. It has the benefit that freeholders must respond within two months, rather than use the delay tactics often seen when trying to secure an informal deal.
To serve a Section 42 Notice, a leaseholder must meet two basic criteria:
Ownership Requirement: The leaseholder must have owned the property for a minimum of two years (though this is slated to change in early 2025, what this space).
Long Lease Requirement: This typically means the lease has a term of at least 21 years when originally granted and nearly everyone meets this requirement.
These requirements ensure that only those who have held the property for a certain length of time and who have long-term interests in the property can exercise their right to extend the lease.
Why is Extending a Lease Important?
Extending a lease on a property is essential for maintaining its value. As the remaining term on a lease decreases, the value of the property tends to drop, particularly when the lease has under 80 years left. This can make the property harder to sell or remortgage. The Section 42 Notice gives leaseholders the opportunity to protect their investment and preserve the value of their property by extending the lease.
What Should You Consider Before Serving a Section 42 Notice?
Before serving the Section 42 Notice, leaseholders should carefully consider several factors. The process can be complex and costly, so it’s important to plan ahead. Some key considerations include:
The Remaining Lease Term: The cost of extending the lease increases as the remaining term decreases, especially when there are fewer than 80 years left on the lease. The ground rent payable under the lease also plays a major part in how lease extensions are valued.
Associated Costs: The leaseholder will be responsible for various costs throughout the process, including the cost of obtaining valuations from both their own and the freeholder’s surveyor (who will come up with different figures, as hard as this is to believe!), as well as legal fees for both parties. It’s important to ensure that you have sufficient funds to cover these costs once a completion date is set, usually 4-10 months after starting the process.
Legal Advice: Given the complexity of the lease extension process, it is highly recommended to seek legal advice before initiating the process. A qualified solicitor can help you navigate the procedures, advise you on your specific rights, and ensure that you don’t overlook any potential issues that may arise during the process. Ensure that you are using a solicitor with experience rather than a generalist or unqualified conveyancer, who simply won't spot the potential issues (you can bet that your freeholder will be using a specialist and they will gain an advantage if you cut corners on your own lease extension solicitor).
What Does a Section 42 Notice Entitle the Leaseholder To?
The primary right conferred by serving a Section 42 Notice is the entitlement to a 90-year extension on the existing lease. Additionally, the ground rent will be reduced to a “peppercorn rent,” meaning that the leaseholder will no longer be required to pay any ground rent. This is a significant benefit, as it eliminates an ongoing cost for the leaseholder and prevents an escalating ground rent from getting worse.
However, while the Section 42 Notice grants the leaseholder certain rights, it also creates certain obligations. Specifically, the leaseholder is responsible for covering the costs of the lease extension, including the freeholder’s reasonable legal fees, their own legal fees, and the costs of the valuation for each side. These costs can add up quickly, so it’s important to be financially prepared before serving the Section 42 Notice.
The Section 42 Lease Extension Process
Once you’ve decided to proceed with extending your lease, the process begins with your solicitor serving the Section 42 Notice. Here’s what you can expect at each stage:
Valuation and Solicitor Appointment: Before serving the Section 42 Notice, you’ll need to appoint a surveyor to value the premium for the lease extension. The surveyor will assess the value of your lease and help you determine a reasonable figure to propose in the notice. Additionally, you’ll need to engage a solicitor to handle the legal aspects of serving the notice and negotiating with the freeholder. Service is sometimes disputed if not done properly, as a tactic to push up the premium payable in negotiations.
Serving the Section 42 Notice: Once the valuation is complete, your solicitor will serve the Section 42 Notice on the freeholder. This notice formally begins the statutory lease extension process.
Freeholder’s Response (Section 45 Notice): After receiving the Section 42 Notice, the freeholder has two months to respond with a Section 45 Notice. This notice will either accept or reject the leaseholder’s proposal for the lease extension. Most section 45 Notices accept the leaseholders right to extend the lease, but counter propose a higher premium.
Negotiation: If there is a disagreement on the premium or other terms of the lease extension, the leaseholder and the freeholder can enter into negotiations. This negotiation period typically lasts two to six months. If no agreement is reached within this time, the leaseholder can apply to the First-tier Tribunal (Property Chamber) for a decision. The application fee is £110 but there will be your solicitors costs of handing the Tribunal paperwork.
Completion: Once the terms of the lease extension are agreed, the final step is completing the transaction. This involves gathering in funds to complete, formal completion then registering the extended lease with the Land Registry. The process may take several months to finalise, but once completed, the leaseholder will have an extended lease and no ground rent to pay.
Conclusion
The Section 42 Notice is a critical part of the lease extension process, giving leaseholders the legal right to extend their lease and protect the value of their property. The route may appear more costly that informal deals, but it is far safer and avoids freeholders looking to retain a ground rent or insert onerous new clauses into the new lease.
While the process can be complicated, understanding the steps involved and seeking appropriate legal and professional advice can make the process smoother and help you secure a favourable outcome. Whether you’re nearing the 80-year mark on your lease or simply looking to secure long-term stability, extending your lease is an important step that requires careful planning and consideration.
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