Buying a Flat with a Short Lease & Assigning the benefit of a Section 42 Notice
by Thi Chan — Posted on 8 January, 2020
A conveyancing guide to extend your lease by assigning the benefit of a Section 42 notice when buying a flat with a short lease.
Assigning the benefit of a Section 42 notice when buying a flat with a short lease
With over four million leasehold flats, leasehold is the most common form of flat ownership in England and Wales. Our previous blogs have looked at the lease extension process and also the recent leasehold consultation. Now we look at the process of buying a property with a short lease.
When looking to buy your own leasehold property, the biggest trap can be taking on a lease about to hit the 80-year mark. This can lead to problems such as the property becoming unmortgageable and unsellable in the future. This is because the premium for extending the lease drastically shoots up into the tens of thousands of pounds once the lease becomes shorter than 80 years (marriage value) and lenders are hesitant to give mortgages on properties with such short lease terms. As a potential buyer, you can take action to avoid taking on a flat with a ticking time bomb.
Ordinarily, a leaseholder can extend their lease using the Leasehold Reform, Housing and Urban Development Act 1993. Under this statutory process, someone that has owned the property for a minimum of 2 years is able to obtain a 90-year lease extension and reduce the ground rent to a peppercorn (zero).
If you buy a property with a short lease about to hit 80 years, you may not have time to wait the required 2 years before the premium for obtaining a lease extension drastically rises and renders the property unmortgageable and unsellable (read more on our leasehold consultation blog to find out about rising lease extension prices). Therefore, the statutory process isn’t a viable option and you may choose to informally negotiate directly with the landlord. However, the landlord is not legally obligated to accept a lease extension in this case, so you could be forced to wait the 2-year minimum regardless & leaving you with less than 80 years remaining.
At first glance this may seem like an impossible situation, but the solution to this problem takes place before you even purchase the property.
Assigning benefit of the Section 42 notice
To overcome the difficulties of lease extension as a new owner, you can contractually procure the seller to serve the Section 42 notice on the landlord and assign the benefit of that notice within a separate agreement to you the buyer. For more information on serving a Section 42 notice, read our blog. Upon completion of the purchase you as the new owner will take over the lease extension process.
In order for this to work, the seller would have to have owned the property for a minimum of 2 years; the landlord cannot be a charitable housing trust where the flat is provided as part of the charity’s work; it must not be a business/commercial lease and there cannot have been a claim that was withdrawn or abandoned in the last year.
Be prepared for the seller to ask you to pay for any and all legal costs that you would be liable for if you had served the notice.
You must arrange to serve the notice on or after the exchange of contracts but before completion. This is because if the buyer were to pull out before exchange, but the notice had already been served to the landlord, the seller would have to complete the lease extension themselves; making them liable for the full cost. For this reason, the seller will normally only serve the Section 42 Notice requesting a new lease after exchange of contracts for sale.
Can the seller carry out the entire lease extension process before completion?
If the seller does not assign the benefit of the Section 42 notice as outlined above, the buyer must wait while the seller goes through the necessary steps to obtain a lease extension from the freeholder. You might prefer to have this already dealt with by the time you purchase the property and could arrange for the seller to complete the lease extension process themselves. However, a lease extension takes several months so this would postpone the sale for as long as this notoriously long process takes. Furthermore, the seller often doesn’t have the funds to carry out a lease extension, which is why they are selling at a reduced price.
The main benefit of this option is on the buyer, who will receive a new lease without having to deal with the landlord and his surveyor.
Is the process different for a probate sale?
A probate sale is where the executor of the deceased’s estate sells the property.
If the property is still in the deceased’s name, the executors can serve the Section 42 notice provided that when the deceased died, they had owned the property for at least two years. They may then assign the benefit of the notice to you.
Is the process different for an auctioned property?
In short, yes, it is.
At an auction, once the bid is accepted, you have effectively exchanged contracts. Therefore, any questions relating to the lease extension need to be asked before you go to the auction room and bid.
The seller needs to have offered to serve the notice in the ‘special conditions’, which will be outlined in the auction information. If they have not done this, you as the buyer will have no legal right to demand that they serve a notice and assign the benefit to you.
Appointing a chartered surveyor to obtain a valuation and estimate the premium to extend the lease
If you are looking to buy a property with a short lease, you need to get valuation advice. This is because you will want to know that an appropriate adjustment has been made to the price you are paying by a chartered surveyor which reflects that there is a short lease.
You will need a valuation carried out by a surveyor specialising in statutory lease extensions to start the lease extension process. It is also essential to have a surveyor because they can estimate the price you will likely end up paying for the lease extension and give you the right price to offer when serving the Section 42 notice. Offer too little and the landlord can reject the claim, which could mean ending up in a first-tier tribunal. Offer too much and you end up overpaying for the lease extension. Starck Uberoi can put you in touch with surveyors we trust.
What if the lease must be extended on completion of the purchase to comply with mortgage lender minimum lease terms?
This might be the case for properties where the years left on the lease has dropped so low that you are struggling to secure a mortgage to buy the property. This is because most banks refuse to mortgage properties below 65 years. To see what minimum lease term these mortgage lenders accept, see our blog on short lease mortgages.
If the seller is unable to extend the lease, you would have to go through the informal route and negotiate directly with the freeholder. If the freeholder is accommodating, it could work out that the lease extension is granted at completion and possibly paid for out of the proceeds of sale of the property.
This alternative is not without its own issues however, as the landlord may take advantage of the situation. They may offer terms that aren’t as generous as they would be if you had gone through the statutory route, which gives you an additional 90 years and removes the obligation to pay ground rent. If the ground rent is reasonable this doesn’t have to be a problem, however there are cases of people agreeing to ground rent that doubles at an alarming rate, making the property unsellable.
If you choose to enter an informal deal, seek out specialist advice to assess the terms you have been offered. Get in touch with Starck Uberoi Solicitors for advice you can rely on at 020 8840 6640.
How Starck Uberoi can help
Starck Uberoi’s experienced conveyancing department can help you with your leasehold arrangements. For more information please contact us either by visiting our Conveyancing or Lease Extension pages, or to book an appointment please call 020 8840 6640. We have offices located in Brentford, Ealing, Canterbury and London Belgravia. For an appointment at one of our offices, email us at firstname.lastname@example.org or give us a call on 0208 840 6640.
- Probate Conveyancing and Mortgages on Inherited Property
- Short Lease Mortgages and Lender Ground Rent Criteria
- Purchasing a leasehold property