What is a Section 42 Notice?

Lease extensions 101: What is a Section 42 Notice?

There’s a lot to consider when you’re looking to extend a lease. One part of the process that comes up often is the Section 42 Notice. Are you unsure of the process? Well, fear not – we explain all here.

So, what is a Section 42 Notice?

Let’s start with the burning question. In short, a Section 42 Notice is a formal request from a leaseholder to extend their lease on a property. The request will be served to the freeholder and any other appropriate party (for example, a third party on the lease).

As a leaseholder, you’re entitled to serve a Section 42 Notice if:

a) you’ve owned the property for at least two years AND

b) your lease is classed as a long lease (granted for a term of 21 years or longer.)

What should you consider before serving a Section 42 Notice?

Before proceeding, leaseholders should take the time to understand the process and the costs. Those will vary according to the specifics of the lease, so understanding yours is crucial.

It’s important to remember that as the lease term decreases, the likely cost of extending it increases. This is especially true if the lease has less than 80 years left on it.

We would always, without exception, recommend taking legal advice before starting. This is for your peace of mind, to anticipate any complications, and to increase your chances of success.

What does a Section 42 Notice entitle the leaseholder to?

The Notice entitles the leaseholder to an extension of 90 years added onto their existing lease term. It also causes the ground rent to be reduced to nothing. This is called a peppercorn rent, meaning the leaseholder will no longer need to pay any ground rent.

Those are the rights, but there are also obligations. The Notice marks the beginning of the statutory lease extension process. So, you must be sure at this point that you have appropriate funds to cover what the process involves.

For example, the leaseholder will be responsible for the freeholder’s legal costs as well as their own, their valuation fee and the freeholder’s valuation fee. It’s important to be aware of this before you go ahead.

When can I not extend a lease?

There are also circumstances when a leaseholder is not entitled to the right to extend their lease. You don’t have this right if:

a) the freeholder is a charitable housing trust

b) the lease is a business lease.

c) you have sublet the flat on a long lease.

d) the property is owned by the Crown or National Trust

If you’re unsure about whether any of those circumstances apply to you, it’s essential to take legal advice. Understanding your circumstances is the first step to understanding your rights.

What’s the Section 42 lease extension process?

OK, let’s say you’re going ahead. The first step is to arrange a valuer and appoint a solicitor. The valuer will assess the cost of the lease extension on your behalf. This ensures that a reasonable value can be proposed in your Notice.

Meanwhile, the solicitor’s role is to advise as well as formally serving the Notice on the freeholder once they have received a copy of the valuation.

The Section 42 Notice gives the freeholder two months to respond. The freeholder can request a 10% deposit of the premium proposed by the leaseholder (subject to a minimum of £250). This is payable within fourteen days of being requested, so it’s important for the leaseholder to ensure that they have some funds available upfront.

After you’ve served the Notice, you can await the Section 45 Notice, which we’ll cover next.

What is a Section 45 Notice?

A Section 45 Notice is served by the freeholder in response to the leaseholder’s Section 42 Notice. The freeholder has to serve the Notice within the specified response date. If they fail to do so, the leaseholder can apply for the new lease to be granted on the terms and price stated in their own initial Notice.

What will a Section 45 Counter Notice say?

The Section 45 Notice will either accept or reject the leaseholder’s Notice. Occasionally, the freeholder will reject the claim outright. They’ll do this if they have reason to believe that the Notice is not valid, or they believe that the leaseholder is not entitled to a statutory lease extension.

However, it’s much more common for the freeholder to accept the Notice but reject the premium. In other words, they’ll confirm that the leaseholder has the right to extend their lease but counter-propose a higher premium. At this time, there is then a further two months in which the leaseholder and freeholder’s valuers can negotiate.

If no agreement has been reached after those two months, the leaseholder has four months to make an application to the Tribunal to determine the terms and premium of the lease extension.

Completing the process

Finally, when the terms and the premium have been agreed, the leaseholder has four months to complete the transaction.

Both the leaseholder and freeholder’s solicitors would liaise regarding the lease documentation. Then, once the transaction has been completed, the leaseholder’s solicitor would apply to the Land Registry to make an application to register the lease extension. Whilst the transaction itself has been completed at this point, the Land Registry does take a long time to formally register the documentation.

Any more questions?

There’s a lot involved in the lease extension process, and it’s understandable if you have questions! At Bate & Albon, we have extensive experience acting for both leaseholders and freeholders throughout this process. If you want advice on your own situation, get in touch.