Landlords: beware of tenant notices
Tenants have many legal rights including the right to buy the freehold or extend the length of the lease. As a landlord, you need to be aware that a legal notice may drop on your doormat any day and, if you ignore it, you do so at your peril.
Extension of the Lease
Under the Leasehold Reform, Housing and Urban Development Act 1993, a flat owner can ask their landlord to extend their lease by an additional 90 years. A called a ‘section 42 notice’ starts the process for not only the extension but also a claim for a reduction of the ground rent to zero.
It is not all doom and gloom, however. In return for granting an extension, the landlord is entitled to financial compensation by way of a cash payment called a ‘premium’.
Landlords should be aware that requests for an extension are more likely to come from tenants whose current lease has less than 80 years left or very soon will drop below the 80 year mark. With these leases, the property is less valuable and could be harder to sell or remortgage. In addition, the premium is likely to be higher where fewer years remain on the lease.
So, what should you do if you receive a section 42 notice?
You should immediately seek legal advice from a specialist in this area of law, as certain statutory time limits will apply on receipt of the notice.
The notice will include a date by which you need to respond with your own counter-notice. This will be at least 2 months after the date that the notice is received. There is therefore a need to act quickly.
If you fail to reply during the time given, the tenant will, by default, have the right to the new lease at the terms and premium they specified in their notice.
You can respond to the notice in a few different ways. You can accept the tenant’s terms entirely included in the notice, or propose your own terms, or you can dispute the tenant’s right to an extension in the first place. Most commonly the premium will be the only point which is contested. This will require the advice of a specialist valuer.
On the service of your counter-notice, there will be an additional period of at least 2 months and no more than 6 months for negotiations. If the premium is disputed, then you can ask your valuer to negotiate on your behalf. After the initial 2 months, either party can apply to the First-Tier Tribunal (FTT) to decide on the amount of the premium. The FTT also has jurisdiction to decide the terms the new lease will contain.
Buying the Freehold
Providing certain requirements are met and upon payment of a premium, a group of tenants can compel you to sell the freehold. Individual tenants cannot do this alone.
Again there is a statutory timetable that will be triggered upon the receipt of a ‘section 13 notice’. The initial notice served by the tenants will give the landlord a deadline for responding. This must be at least 2 months after the service of the notice. You should seek the advice of a specialist legal advisor and surveyor when considering your response in your counter-notice. In the counter-notice, you need to decide on one of the following options:
- admit that the participating tenants are collectively entitled to purchase the freehold;
- deny they are entitled to do so and set out those reasons why; or
- state your intention to apply for an order that the tenants’ right cannot be exercised as you intend to redevelop the premises.
Once a counter-notice has been served, a further 2 month period begins. This is intended to be used to conduct negotiations between the parties’ surveyors and, if possible, reach agreement on the premium to be paid. If any issues remain after another 4 months (i.e. a total of 6 months since the counter-notice was served), then the participating tenants must apply to the FTT for a declaration. The FTT will decide on the terms which have not been agreed.
If you have received either of the above notices, it is essential that you enlist the help of a specialist lawyer and surveyor. At Bolt Burdon, we would be happy to recommend surveyors who we regularly work with. If you need advice following the service of a notice, please contact Matthew Hawkins at email@example.com or on 020 7288 4759.