May 22, 2024 5:39 am

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Nikka Sulton

The market for purchasing short lease flats remains robust, attracting investors and developers keen on acquiring these properties for refurbishment and lease extension. In this blog, we explore methods for valuing short leases, particularly concerning statutory lease extension.

While the Graphs of Relativity are commonly used to calculate the leasehold value of properties with less than 80 years remaining, they may not always be suitable for valuing short leases nearing 30 years.

In cases where the lease term is less than 30 years, alternative valuation methods should be considered. Employing an investment calculation can be more appropriate in determining the existing lease value, without the need for additional allowances.

For short leases nearing expiration, typically around 20 to 30 years, valuation involves assessing what a prudent investor would pay to acquire the lease, considering that the property will revert to the freeholder at the end of the term. Valuers must evaluate the property’s potential rental income, deducting associated costs, and apply an appropriate yield reflecting the property’s status as a wasting asset.


What is a Section 42 Notice?

A Section 42 Notice is a formal request from a leaseholder to the freeholder or landlord (or both), along with any other relevant parties, to extend their lease on a property. This request grants the leaseholder an extension of 90 years beyond the remaining lease term, with the ground rent reduced to zero.

With the assistance of a qualified valuer, your notice should specify a premium or price for the lease extension process.

Following the service of the Section 42 Notice, the landlord or freeholder has two months to respond with a Counter Notice. This notice either accepts or rejects the claim and proposed price. If the freeholder rejects the lease premium, an additional two-month period is provided for negotiation.

It’s crucial that your Section 42 Notice is accurate and complete. Any inaccuracies may prompt the freeholder to seek dismissal through court action. If the notice is dismissed, you will be barred from submitting another application for a lease extension for a period of 12 months.


Are you eligible to extend your lease?

To be eligible for a lease extension, the original lease must have been for a duration exceeding 21 years, and you must have possessed ownership of the property for a minimum of two years. However, you cannot request a lease extension if your landlord is a charitable housing trust, or if the lease pertains to a business or commercial property.


Can a landlord or freeholder refuse to extend a lease? 

If you meet the criteria for a lease extension, the freeholder is generally unable to refuse your request. However, they may contest the proposed premium.

The majority of leaseholders are covered by the statutory lease extension procedure outlined in the Leasehold Reform, Housing and Urban Development Act 1993. To be eligible, you typically need to have owned the flat for the past two years.

If you’re a freeholder or landlord and you receive a Section 42 Notice, it’s crucial to take prompt action. Failure to respond may result in being bound by the terms proposed by the leaseholder, thereby relinquishing control over the premium amount.


Failure to provide a counter notice

When a tenant serves a valid Section 42 notice (a notice of intent to apply for a lease extension) on a landlord, the landlord must respond with a counter notice within the specified timeframe, which is typically a minimum of two months from the date of the notice. However, if the landlord fails to respond, the tenant must take action.

In such cases, where the landlord neglects to provide a response to the Section 42 notice, the tenant is required to apply to the County Court for a Vesting Order. If granted, this order removes the matter from the landlord’s control, and the court is likely to grant the new lease to the tenant in accordance with the terms outlined in the original Section 42 notice.


What the law says

The relevant legal provisions are outlined in Section 49 of the Leasehold Reform, Housing and Urban Development Act 1993, which addresses situations where a landlord fails to provide a counter notice. This can be summarized as follows:


Under subsection 1 of the act:

If the tenant has given notice in accordance with Section 42, but the landlord has failed to provide a counter notice, the court may, upon the tenant’s application, issue an order determining the terms of acquisition as proposed in the tenant’s notice.

In practical terms, this means that if a landlord does not respond with a counter notice as required by Section 45 of the same act, the tenant has the option to apply to the court for a vesting order. In most cases, the court is likely to grant a new lease based on the terms outlined in the tenant’s original notice.


Under subsection 2 of the act:

The court will not issue such an order unless it is satisfied that the tenant has the right to acquire a new lease.

This requirement entails that the tenant must have owned the leasehold property for a minimum of 2 years, and the Section 42 notice served by the tenant must be valid.


Deadline for a vesting order application:

Subsection 3 of the act states:

Any application for an order must be made within six months from the deadline for the landlord to serve a counter notice.

In practical terms, this means that a leaseholder must file an application with the court within six months from the date the landlord was required to provide a counter notice.


Vesting orders benefit the tenant

According to case law, specifically the ruling by the Court of Appeal in Willingale v. Globalgrange [2000] 2 EGLR 55, the phrase “the court may make an order” actually translates to “the court must make an order.” This means that the court has limited discretion in granting an order for a lease extension. If the landlord fails to respond to a Section 42 notice, it’s highly likely that the court will grant a new lease based on the terms outlined by the tenant in the original notice. Essentially, the tenant secures a new lease on their terms and at their specified price. Obtaining a lease extension through a vesting order typically results in a more favourable price for the leaseholder.


Likely legal fees

– Solicitor fees: £1600 + VAT (if undefended)

– Court fee: £300 (amount may vary)

– Counsel fees: £700 + VAT

– Despite these costs, significant savings can be realized. The premium proposed in the tenant’s Section 42 notice is often granted by the court, typically starting lower than what the Leasehold Valuation Tribunal would set. Additionally, the court is likely to offset the incurred legal fees against the premium.




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