What Is A Section 42 Notice – Extending A Lease

what is a section 42 notice

Trying to sell a leasehold property can be hard to navigate as there can be many hidden roadblocks including issues with the lease, onerous ground rent levels and increasing service charges.

Notably, one of the most expensive and lengthy additions to selling a leasehold property is surrounding the length of the lease.

A short lease can cause chaos during the selling process, and set you back thousands of pounds. A short lease becomes a serious issue when it hits the 80 year mark as it attracts something called marriage value. However, most mortgage advisors will simply not lend on a leasehold property that is at 90 years, this is because it could cause saleability issues in the not so distant future.

Extending a lease can cost thousands, I too was put into this situation trying to sell my flat, whilst I was able to steer clear of this eventually as my issue involved ground rent over £250, it left me with the question, how on earth would I be able to afford this if it was my only option?

If you’re looking to complete a formal lease extension to get your sale over the line but just can’t afford the ridiculous costs, this article is all about a what a section 42 notice is, when you might use it and what a lease extension does.

What Is A Formal Lease Extension?

A formal lease extension extends the lease by 90 years and reduces the ground rent to a peppercorn. The cost of this is calculated on your existing ground rent payments by the freeholder to work out what the premium would be. You can use an online lease extension calculator for a rough ballpark figure.

During this process you would also have to pay your own legal fees, and the fees of the freeholder. The process can take some months to complete.

Informal Lease Extension

An informal lease extension is often the only option for those who can’t afford to part with thousands of pounds for formal route. However, it is also very very important to know that if you try to buy your freehold ‘informally’ from your freeholder that you step outside any legal protection you would have if you acted inside the ’67 Act’. 

A lot of people say to avoid an informal lease extension where possible because of this. A formal lease extension will get you the best premium price and legal protection meaning that the freeholder cannot insert onerous clauses into the extension, and they must give you the extension within a certain time frame. But this can take 6-10 months, or longer to complete. Where time is the essence with leasehold sales, this is another reason why some opt for an informal lease extension.

The premiums sometimes are not so excessive and some of the informal offers are similar to the statutory formal route in what they put into the extension, i.e. nothing detrimental.

Informal extensions, could make the situation worse (for example the ground rent is increased). Above £250 per annum can make the property a risky assured tenancy, and above 0.1% of property value per year not great either. But you have to read everything, and check everything with a fine tooth comb and use an Alep solicitor for the process.

How Do I Know If I Can Extend The Lease?

In order to apply for a lease extension you need to have owned your property for at least two years. As a formal lease extension can take some time to complete, you can start the lease extension process and transfer it across to the new owner for its completion.

It would usually be the current leaseholders responsibility to pay for the lease extension, unless you have privately come to a decision with the new owner where you may split the costs, for example. These private negotiations should be carried out between your legal teams.

What Is A Section 42 Notice?

If a qualifying leaseholder is selling a flat, it is possible to serve a Notice (Section 42 Notice) and to then assign the benefit of the Notice to the buyer upon completion. A section 42 notice is the right to extend a lease within two years.

This greatly assists the saleability of a property, but it is essential that the buying party engages specialist enfranchisement advisors as any mistake can be fatal for the claim.

If you can’t afford a formal lease extension up front, a section 42 notice is a great route. The premium can be paid from the sale of the flat towards the very end of the selling and buying process. The solicitor can hold the money until the extension is completed and pay the freeholder directly.

Whilst the money does come from the sale of your property, you’re not having to fork out upfront or take out costly loans to fund it, and move on.

In Summary

For those that desperately want to shift their leasehold flat, a section 42 notice is a great way to proceed with a lease extension if you have profit from selling the property, or are wanting to extract some to pay for it.

It’s generally best to go down a formal lease extension route, but you should always consult a legal professional for advice.

There are a couple of other options if you don’t want to part with any cash from your sale. You can list the property to cash buyers only with your agent, but it’s a well known fact that a short lease is considered a lease defect and a cash buyer would expect a considerable drop in the price of the flat advertised.

Another option is to wait for the leasehold reform, hoping that leaseholders will be able to extend at a lower premium rate. However, the leasehold reform has already been shelved for the time being, and it does not look very promising that the new reforms will materialise soon.

Whichever route you choose, always use a legal professional and read the fine print of everything to ensure you’re not signing away to something far worse.

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