Lease extension on completion - Assign the benefit to the buyer

'Lease extension on completion' is where a seller of a leasehold property with a short lease initiates the statutory lease extension procedure by serving a Section 42 Notice on the freeholder, but then assigns the benefit of that notice to the buyer who officially completes the lease extension after they have purchased the property.

This approach is typically used when the remaining term of the lease is approaching or below 80 years, or is too short for the buyer to obtain a mortgage or for the property to be readily saleable.

By serving the Section 42 Notice, the seller locks in the right to a statutory 90-year lease extension with a peppercorn ground rent and, crucially, fixes the valuation date for the premium.

Why choose a Lease Extension on Completion?

The primary reason for a lease extension on completion is to enable the sale of a leasehold property that has a short lease, typically below 80 years. Properties with short leases can be difficult to sell or mortgage, as many mortgage lenders are unwilling to lend against them due to the diminishing value of the lease.

By serving a Section 42 Notice on the freeholder before selling, the seller formally triggers the statutory lease extension process under the Leasehold Reform, Housing and Urban Development Act 1993.

This action legally establishes the right for the lease to be extended by 90 years with a peppercorn ground rent and, crucially, fixes the valuation date for the premium payable.

Assigning the benefit of this notice to the buyer as part of the sale contract allows the buyer to step into the seller's shoes and continue the statutory process after they complete the purchase.

This makes the property a viable option for buyers requiring a mortgage and broadens the pool of potential purchasers, thereby facilitating the sale of a property that might otherwise be unsaleable or require a significant price reduction.

Furthermore, serving the Section 42 Notice before assigning provides some certainty for the buyer regarding the basis of the premium calculation by fixing the valuation date. It also means that the legal steps of serving the initial notice are handled by the seller and their solicitor before the buyer takes ownership.

Risks of a Lease Extension on Completion

It is essential for both buyers and sellers, but particularly the buyer, to be fully aware of the risks involved compared to the seller completing the lease extension before the sale.

These risks primarily arise because the buyer is taking on the responsibility and management of the statutory process after purchasing the property.

Section 42 Notice incorrectly served

A fundamental requirement for a successful statutory lease extension is that the initial Section 42 Notice must be drafted and served correctly according to the strict legal procedures.

If the seller's solicitor makes an error in the notice or its service, the notice could be invalid. If this is discovered after completion, the buyer would find they have not, in fact, inherited the statutory right to a lease extension, potentially leaving them to start the process over again, which could be costly and time-consuming, and might result in a higher premium.

To mitigate this risk, the buyer's solicitor must undertake thorough checks before completion to confirm the validity of the Section 42 Notice and its service. It is highly recommended that a specialist lease extension solicitor be instructed by the seller to serve the notice and deed of assignment correctly, and by the buyer to review everything before proceeding./p>

Higher Premium than expected

Although serving the Section 42 Notice fixes the valuation date, the final premium payable to the freeholder is subject to negotiation and potentially determination by the First-tier Tribunal.

The buyer might find that the freeholder's counter-offer is significantly higher than the premium amount proposed in the Section 42 Notice or originally budgeted. If the final agreed or determined premium and associated costs (including the freeholder's reasonable legal and valuation fees) exceed the discount or buffer negotiated in the property's purchase price, the buyer could be left out of pocket.

To mitigate this risk, the buyer should obtain their own independent valuation advice before agreeing to the assignment, even if the seller has already obtained one. The buyer needs a clear understanding of the likely premium range and all associated costs, ensuring a sufficient buffer is factored into the property purchase price.

Absent or unresponsive Freeholder problems

While the seller should have served the Section 42 Notice on the freeholder, there is still a risk that the freeholder may become unresponsive or turn out to be absent after the sale completes.

The responsibility for dealing with this then falls entirely on the buyer. This could lead to delays and the need for the buyer to pursue complex and costly court action, such as obtaining a Vesting Order, to complete the lease extension.

To mitigate this risk, the buyer's solicitor should make enquiries to confirm the freeholder's responsiveness and contact details are up-to-date before completion. Ensure there is clear communication channels established with the freeholder early in the process.

The Mortgage Lender won't agree

If the buyer requires a mortgage to purchase the property, their mortgage lender must be fully aware of and agree to the lease extension on completion arrangement.

Lenders have specific requirements regarding the unexpired lease term at the start and end of the mortgage period. Some lenders may be unwilling to lend on properties with very short leases, even with an assigned Section 42 Notice. Crucially, the lender must consent to the assignment of the benefit and the arrangement for the lease extension to be completed after their mortgage is in place.

To mitigate this risk, the buyer's solicitor must confirm the mortgage lender's specific requirements for lease length and obtain explicit confirmation from the lender that they will accept the assignment of the Section 42 Notice and allow the lease extension to be completed post-completion before the buyer commits to the purchase.

The Lease Extension on Completion process

The process begins with the seller initiating the statutory claim and ends with the buyer completing the lease extension with the freeholder after purchasing the property. Here are the typical stages involved:

Buyer and Seller agree on terms within the sale contract

Before the property sale contract is exchanged, the buyer and seller must agree on the terms relating to the lease extension process that the buyer will take over.

Key points to agree and document in the sale contract include the premium amount proposed in the Section 42 Notice (often based on a valuation obtained by the seller or buyer), how the premium might be adjusted if the freeholder or Tribunal determine a different figure, and crucially, how the associated costs of the lease extension (including the freeholder's reasonable legal and valuation fees, the buyer's own legal/valuation costs, and the seller's initial costs for serving the notice) will be apportioned or contributed to by the seller.

Seller serves the Section 42 Notice

Once terms are agreed with the buyer, the seller's solicitor serves the formal Section 42 Notice on the freeholder. This notice claims the statutory right to a lease extension and proposes a premium and terms.

Serving the notice is a legal act that only the current leaseholder (the seller) can undertake. A solicitor must do this to ensure it is drafted and served correctly according to strict legal procedures.

At this stage, the seller's solicitor will also prepare the necessary documentation for the property sale transaction, including the assignment of the Section 42 Notice and special conditions to be inserted into the sale contract confirming the buyer's obligations to pursue the lease extension post-completion.

A statutory deposit of 10% of the premium amount stated in the Section 42 Notice is payable to the freeholder or their solicitor upon request after the notice is served. Responsibility for paying this deposit should be clearly agreed and documented between the buyer and seller in the sale contract.

Sale Completion

On completion, the seller transfers ownership of the leasehold property to the buyer. Simultaneously, and as agreed in the sale contract, the seller formally assigns the benefit of the Section 42 Notice to the buyer.

The buyer is now the legal owner of the property and the leaseholder who will pursue the lease extension with the freeholder.

Buyer negotiates terms with the Freeholder post-Completion

After the property sale completes, the freeholder will serve their Section 45 Counter-Notice in response to the original Section 42 Notice (within the statutory two-month timeframe from the date the S42 Notice was served).

This counter-notice will state whether the freeholder accepts the buyer's right to a lease extension and will set out the freeholder's proposed premium and terms.

The buyer (now the leaseholder) and their solicitor and surveyor then enter into negotiations with the freeholder (or their representatives) to agree on the final premium and terms of the new lease.

If terms cannot be agreed within six months of the freeholder serving the counter-notice, the buyer must apply to the First-tier Tribunal (Property Chamber) for a determination.

Read our guide on how to successfully negotiate your premium with your freeholder.

Lease Extension Completion

Once the premium and terms for the new lease have been agreed between the buyer and the freeholder (either through negotiation or Tribunal determination), the legal completion of the lease extension takes place.

This involves the freeholder drafting the new lease (often a Deed of Surrender and Regrant or Deed of Variation), which is then agreed and formally executed by the buyer (and their mortgage lender via a Deed of Substituted Security, if applicable) and the freeholder.

The buyer pays the agreed premium and the freeholder's reasonable legal and valuation costs. The buyer's solicitor then submits the necessary application to register the new lease at the Land Registry. This final Land Registry process can sometimes take several months.

The costs of Lease Extension on Completion

The Lease Extension Premium

This is the most significant cost – the amount paid to the freeholder for the grant of the new, extended lease. The premium is determined through negotiation between the buyer (after completion) and the freeholder, or by the First-tier Tribunal (Property Chamber) if agreement cannot be reached.

The amount is calculated based on a statutory formula (though upcoming legislation may change this), taking into account factors like the current lease length, property value, and ground rent. A statutory deposit of 10% of the premium proposed in the Section 42 Notice is payable to the freeholder or their solicitor upon request after the notice is served.

Read more about the premium payable to the freeholder.

The buyer's legal fees

The buyer will incur legal costs for their solicitor's work related to the assignment of the Section 42 Notice (reviewing its validity, the deed of assignment, and specific clauses in the sale contract) as part of the property purchase.

They will then have separate legal fees for handling the lease extension process itself after completion (negotiation, drafting/reviewing the new lease, dealing with the freeholder's solicitors and the Land Registry registration). These costs can vary significantly depending on the complexity of the matter and the solicitor's fees.

The seller's legal fees

The seller will incur legal costs for their solicitor serving the Section 42 Notice on the freeholder, preparing the deed of assignment and the necessary special conditions in the property sale contract, and coordinating with the buyer's solicitor regarding the lease extension aspects of the sale.

These costs are typically paid by the seller from the sale proceeds, but this should be confirmed in the agreement with the buyer.

Valution/Surveyor fees

Professional valuation advice is essential to determine the likely premium payable. The seller may obtain a valuation to propose a premium in the Section 42 Notice.

The buyer should also obtain their own independent valuation advice before agreeing to the assignment to ensure the proposed premium is realistic and to assist in post-completion negotiations. Surveyor fees vary based on the property and the surveyor's rates.

Freeholder's reasonable legal and valuation fees

Under the statutory process, the leaseholder (in this case, the buyer after completion) is responsible for paying the freeholder's reasonable legal and valuation costs incurred during the lease extension process.

These fees are in addition to the premium and the buyer's own professional fees and must be reasonable in scope and cost. Buyers should obtain an estimate of these fees where possible, although freeholders are not always proactive in providing this early on.

Learn more about the freeholder's reasonable costs.

Court or Tribunal fees

If the buyer and freeholder cannot agree on the premium or terms through negotiation, an application must be made to the First-tier Tribunal (Property Chamber) for a determination.

This involves additional application and hearing fees payable to the Tribunal, as well as potentially increased legal and surveyor costs due to the Tribunal process.

Agreeing cost responsibilities between buyer and seller

Given the various costs involved for both parties, it is absolutely essential that the buyer and seller have a clear, legally binding agreement within the property sale contract outlining who is responsible for which costs, particularly regarding the seller's initial costs (serving the S42 notice, deed of assignment) and how these are accounted for in the final sale price or through direct contributions. Failure to do so is a common cause of disputes and can leave the buyer with unexpected expenses.

How long does a Lease Extension on Completion take?

The overall estimated timeline from the seller serving the Section 42 Notice to the buyer completing and registering the lease extension can vary considerably, but often falls within a range of 6 to 12+ months, depending heavily on whether the case goes to the Tribunal and the efficiency of all parties involved. It is crucial to factor in this post-completion period when budgeting time and costs.

While this process helps facilitate the sale of the property by initiating the statutory claim early, the actual lease extension itself still needs to follow the statutory procedure, which takes time to complete after the property sale. The overall timeline involves two main phases:

Phase 1: Seller serving Section 42 Notice to sale completion

The duration of this initial phase depends on how quickly the seller obtains their valuation (if needed to determine the premium in the notice), instructs their solicitor to draft and serve the Section 42 Notice and the necessary assignment documentation, and critically, how quickly the buyer and seller proceed with the property sale transaction itself.

Serving the notice correctly is a legal step that needs to happen before sale completion, and this phase might add several weeks, potentially a couple of months, to the standard property sale timeline, depending on efficiency.

Phase 2: From sale completion to lease extension completion

This phase begins after the property sale completes and the buyer legally inherits the benefit of the Section 42 Notice. The statutory clock for the lease extension process is already running from when the seller originally served the notice. Key periods within this phase include:

• Freeholder's Counter-Notice: The freeholder has a statutory period of up to two months from the date the Section 42 Notice was originally served by the seller to serve their Section 45 Counter-Notice (for a lease extension) on the buyer (now the leaseholder).
• Negotiation Period: If the premium or terms are disputed in the counter-notice, the buyer and freeholder have a period of up to six months from the date the freeholder served the counter-notice to negotiate and reach an agreement.
• Tribunal Determination (If Applicable): If agreement is not reached within the negotiation period, the buyer must apply to the First-tier Tribunal (Property Chamber) within the following six months for a determination. The Tribunal process adds significant time, potentially many months, depending on their caseload and the complexity of the case.
• Legal Completion and Registration: Once terms and premium are agreed or determined, the legal process of completing the new lease documentation and registering it at the Land Registry takes place. This adds several weeks to several months, with Land Registry registration sometimes taking a considerable time.

Assuming negotiation is successful and avoids a Tribunal application, the buyer might typically complete the lease extension within 6 to 9 months after the property sale completes, depending on how quickly negotiations proceed and the conveyancing solicitors work. If the case goes to the Tribunal, the overall time for this phase will be significantly longer.

What happens at an auction?

Properties with short leases are sometimes sold at auction. Buying a property this way with an assigned Section 42 Notice presents unique opportunities but also increased risks compared to a standard private treaty sale, primarily due to the limited time available for due diligence before bidding and the binding nature of an auction sale.

If you are considering buying a property at auction with the benefit of an assigned Section 42 Notice, it is absolutely critical to take the following steps before the auction:

• Obtain an Independent Premium Valuation Before Bidding:

  Do not rely solely on the premium figure stated in the Section 42 Notice provided by the seller within the auction pack. This is merely the seller's opening offer, and the freeholder is likely to dispute it in their counter-notice.

  You must commission your own specialist surveyor to provide an independent valuation of the likely statutory premium payable to the freeholder before you bid. This is essential for budgeting and determining the maximum purchase price you should consider.

• Instruct a Specialist Lease Extension Solicitor to Review the Legal Pack:

  Before the auction date, have a solicitor specialising in lease extensions thoroughly review the legal pack provided by the seller's solicitors. This pack should contain the Section 42 Notice, proof of service, the draft deed of assignment, and any response received from the freeholder.

  Your solicitor must verify the validity of the Section 42 Notice and ensure the documentation for assigning the benefit is correct and protects your interests.

• Confirm Your Mortgage Lender's Position (If Applicable):

  If you require a mortgage to purchase the property, you must confirm with your mortgage lender before the auction that they are willing to lend on the property with its current short lease and that they explicitly accept the arrangement of the lease extension on completion via the assigned Section 42 Notice.

  Obtaining this confirmation is crucial as auction sales are legally binding on the fall of the gavel, and you don't want to be in a position where you've bought a property but cannot secure the necessary funding.

• Factor In All Costs and Timelines:

  Remember that buying with an assigned notice at auction means you take on the responsibility, costs, and time involved in completing the lease extension after you purchase the property.

  Ensure your budget accounts for the likely premium, freeholder's reasonable costs, your own professional fees, Land Registry fees, and potential Tribunal costs. Be realistic about the timeline for the lease extension process post-completion.