What is a Section 278 Agreement?

A Section 278 Agreement is a legal agreement between a developer and a highway authority to carry out highway works.

Are You A Residential Long Leaseholder Thinking About Extending Your Lease?

Lease Extensions and the Leasehold and Freehold Reform Act 2024: What Leaseholders Need to Know

For many residential leaseholders, extending a lease becomes an important consideration as the remaining lease term reduces. Whilst there is no fixed point at which a lease must be extended, many leaseholders begin exploring their options once the term falls below 85 years. This is because the cost of extending a lease can increase as the remaining term reduces and, once a lease falls below 80 years, additional valuation considerations (for example marriage value) are likely to arise, which can significantly increase the premium payable. The length of the remaining lease can also affect a property’s marketability and mortgageability.

There are two routes available to a leaseholder wishing to extend their lease:

An informal lease extension, negotiated directly with the landlord; or
A formal statutory lease extension, exercised under the Leasehold Reform, Housing and Urban Development Act 1993.

Informal Lease Extensions

An informal lease extension is where the landlord and leaseholder agree any premium payable and terms of a new lease, directly.

It can be an advantageous approach. The parties may be able to reach agreement more quickly and avoid the procedural requirements associated with the statutory process, such as deducing title and payment of a deposit, for example.

However, leaseholders should proceed with caution. Unlike the statutory process, there is no strict timetable to follow. Informal negotiations can become drawn out and protracted, frustrating the process.

Further, unlike the statutory process, there is no obligation on the landlord to grant a particular length of term of the new lease or reduce the ground rent to a peppercorn.

Whilst a landlord’s proposal may initially appear attractive, leaseholders should carefully consider the new lease terms.

It is not uncommon for a leaseholder to focus primarily on the premium being proposed, whilst overlooking provisions in the proposed new lease that could prove costly in the future.

Formal Statutory Lease Extensions and Section 42 Notice

Many leaseholders choose to extend their lease through the statutory procedure, as set out in the Leasehold Reform, Housing and Urban Development Act 1993.

Currently, a qualifying leaseholder of a flat is entitled to receive a new lease for the existing unexpired term plus an additional 90 years at a peppercorn ground rent. The leaseholder is generally required to pay a premium to the landlord, together with the landlord’s reasonable professional costs.

The statutory process begins with the service of a formal Section 42 Notice. This is an important document, which must contain prescribed information, including, for example:

Details of the leaseholder and the property;
Particulars of the existing lease;
Any premium proposed;
Details of the leaseholder’s representative; and
The date by which the landlord must respond.

Care must also be taken to identify the correct landlord on whom the notice should be served. In some cases there may be intermediate landlords, management companies or other parties whose interests need to be considered. The statutory process also imposes a strict timetable following service of the Section 42 Notice. If the notice contains errors, is served on the wrong landlord, statutory deadlines are missed or procedural requirements are overlooked, the consequences can be significant. In some circumstances, a claim for a new lease can be deemed withdrawn, potentially resulting in wasted costs, delay and, depending on the remaining lease term, a higher premium when a fresh claim is made.

The process does not end with service of a section 42 notice. The landlord must serve a counter-notice setting out whether the terms proposed in the section 42 notice are agreed or not, and any counter proposals. Negotiations usually follow and, if agreement cannot be reached regarding the premium or terms, an application may need to be made to the First-tier Tribunal (Property Chamber) within the statutory time limit.

The process involves (but is not limited to):

Serve section 42 notice
Landlord’s section 45 counter notice
Negotiation period
Completion of a new lease, or alternatively, an application to the First-tier Tribunal to determine the premium and/or the new lease terms.

Premium

Valuation is often one of the most contentious aspects of the process. The premium is determined using statutory valuation principles which can be complex and frequently require the assistance of specialist surveyors experienced in leasehold enfranchisement matters.

The statutory procedure provides valuable protections and rights for leaseholders as well as a timetable. It is not however a process that should be approached lightly. Early legal and valuation advice can help ensure that the correct procedure is followed and avoid potentially expensive mistakes.

The Leasehold and Freehold Reform Act 2024

The Leasehold and Freehold Reform Act 2024 was introduced with the aim of making lease extensions and enfranchisement claims cheaper, simpler and more accessible. However, whilst parts of the legislation have been brought into force, many of the headline lease extension reforms have not yet been implemented and require further legislation and regulations before taking effect.

One important reform that has already been implemented is the removal of the previous two-year ownership requirement. Leaseholders no longer generally need to own a property for two years before exercising statutory lease extension rights.

The reforms which are expected to be introduced include:

990-Year Lease Extensions – The Government intends to increase the length of statutory lease extensions for both flats and houses to 990 years at a peppercorn rent.
Removal of Marriage Value – Marriage value currently forms part of the premium calculation where a lease has less than 80 years remaining. The proposed reforms seek to abolish marriage value, potentially reducing the overall cost of a lease extension for many leaseholders.
New Valuation Method – The Government is consulting on a more prescribed valuation structure designed to simplify the calculation of premiums and reduce disputes.
Changes to Costs – Further reforms are proposed to reduce the extent to which leaseholders are required to contribute towards a landlord’s legal and valuation costs.

Conclusion

Leaseholders approaching 80 to 85 years of a remaining lease term should consider taking advice sooner rather than later. The decision whether to extend a lease now, wait for the implementation of future reforms, proceed informally with a landlord or exercise statutory rights, will depend on the circumstances of each case.

Whilst the proposed reforms have attracted considerable attention, leaseholders should be cautious about delaying a lease extension solely in anticipation of future legislative changes. Whether it is sensible to proceed now or await implementation of the reforms will depend on the individual circumstances of each case, including the remaining lease term and the likely premium payable under the current regime.

Whether pursuing an informal arrangement or serving a formal Section 42 Notice, obtaining specialist legal and valuation advice at an early stage can help leaseholders understand their options, avoid procedural pitfalls and ensure that any lease extension represents the best long-term outcome for their property.

Our property dispute resolution team regularly advise leaseholders on lease extensions, including serving statutory notices, negotiations with landlords and applications to the First-tier Tribunal. If you are considering extending your lease and would like to discuss your options, please get in touch.