How to negotiate your lease extension

It is very common for Leaseholders to approach their Freeholder directly for a lease extension on what is often termed an ‘informal basis’ versus the formal S42 notice process.  For a sense of perspective, it is very much worth establishing what you are entitled to by law under the Leasehold Reform, Housing and Urban Development Act 1993 (the Act).

The Act gives Leaseholders a mechanism which guarantees that their Freeholder grants them a lease extension (technically a new lease), on the same number of years as the existing term plus an additional 90 e.g. a 70-year lease will turn into a 160-year lease. Any ground rent payable is extinguished and set to a peppercorn or zero.

Enquiries to surveyors often start with a client informing them that they have written to their Freeholder and after covering their surveyor’s fees of around £600 – £1,000, they have received an offer that is not only vastly more than they were expecting, their Freeholder is also asking for substantially more ground rent than they were before. Rents starting at £350, doubling every 15/20 years are not uncommon.

Your first sense of perspective can often be via an online lease extension calculator, which is useful for establishing whether it is 10, 20 or 30 thousand pounds that you would be looking at, but over and above that, these do what they say on the tin; calculators provide estimates, not settlements or negotiations. Surveyors are often asked “how accurate are these calculators”. The answer is that they beneficial in establishing a ball park for the premium (otherwise what would be the point of their existence) but that it all. You will also tend to find that the Freeholders offer is vastly north of the figure that you have obtained, and in order to get them down, sound reasoning is required of the sort that can only come from a full valuation report.

So, once you have instructed your expert surveyor and they have produced a report, after giving it a thorough read, turn to the last page and read the conclusion. Most reports will state a figure at which the surveyor reasonably believes they will achieve subject to a negotiation, along with a lower figure for inclusion into the S42 notice and an estimate as to what the Freeholder is likely to counter with in their S45 notice. From here you have 2 options:

Option 1: instruct your surveyor to negotiate informally

The advantages of this are mainly down to time and cost. You don’t need to pay your solicitor to serve the S42 notice, nor do you have to cover the legal costs of the Freeholder’s solicitor serving the S45 counter notice. The Freeholder will still require you to cover their legal costs outside of this, but overall these should be a lot lower than the S42 route. Negotiations are often completed inside of a month, against 3-6 months for the S42.

The main disadvantage here is that your surveyor will be in a far weaker negotiating position and the Freeholder and their surveyor know that. It ultimately comes down to a numbers game where you compare the higher informal negotiated offer plus lower costs to the potentially lower negotiated offer plus higher costs.

Option 2: instruct your Solicitor to serve a S42 and have your surveyor negotiate formally

This is the preferred route on 9 out of 10 lease extension claims as it often takes the pressurised situation of the S42 procedure to enable your surveyor to strike a reasonable deal and an experienced surveyor will know all the tricks in the book and use them to your advantage.

It is a fact that around 95% of all claims involve the Leaseholder making an application to Tribunal, but only around 3% of all applications go onto an actual hearing. A good Leaseholder’s surveyor will manufacture a situation where both sides are forced to settle at a reasonable price, due to disproportionately high Tribunal costs (typically no less than £5,000 but often nearer to £10,000 for a simple lease extension claim).

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