A leaseholder looking to extend their lease under the Leasehold Reform, Housing and Urban Development Act 1993 (LRHUDA 1993) will find that they need to have been the registered owner of the leasehold interest at the Land Registry for two years before a section 42 notice can be served.
This particular rule is however shortly to be abolished, as part of one of many planned leasehold reforms over the next year or so, and in this article we look at the implications for leaseholders, purchasers of leasehold flats and their advisors.
Reforms planned for early 2025
A ministerial statement on 21 November 2024 [link to https://questions-statements.parliament.uk/written-statements/detail/2024-11-21/hcws244] made the announcement, stating that “we intend to commence the Act’s provision to remove the ‘2-year rule’ in January next year. This will mean that leaseholders will no longer have to wait two years after purchasing their property before exercising their rights to extend their lease or buy their freehold, giving more leaseholders control over their properties from the outset”.
This should be a swift and relatively straightforward change to the current rules, unlike more complicated issues to be addressed in further government consultations in the second half of 2025, such as reinvigorating commonhold and changing how lease extensions are valued.
The change will simply be that a leaseholder will be able to apply to extend their lease using a section 42 notice under the LRHUDA 1993 from day 1 of being the registered owner of the leasehold interest. Note however that the Land Registry does have a backlog at present, and there may be a gap between completing a purchase and the completion of registration spanning several months, effectively pushing back the date that the new right can be used.
Current process
As things stand, the seller of a short lease flat needs to use their two years of ownership to start the statutory lease extension process off, by having a valuation and serving a section 42 notice. In some cases, a voluntary lease extension may be possible, but importantly, this isn't always an option i.e. in the case of some local authority freeholders.
The requirement on sellers to do this can be undesirable because of the costs incurred, and because of the uncertainty in finding a buyer before the leaseholder runs out of time under the statutory timetable set out under the LRHUDA 1993. Broadly speaking, the leaseholder will have four months to complete the lease once the premium and lease terms have been agreed. If a sale falls through, it can create additional costs and problems for a seller part-way through the lease extension process, needing a buyer or funds from the sale to finish the process off.
Once a buyer is found, the current practice is for the seller to assign the benefit of the section 42 notice to the buyer on completion of the flat sale. The buyer then steps into the seller's shoes and completes the process.
This requires negotiation between the parties as to who pays for the lease extension claim notice and valuation, and whether there is a retainer from the sale proceeds to cover the eventual lease extension costs once they are known.
It can be difficult to pin these numbers down, and the extra paperwork generates additional costs. This is where the reforms come in.
New process
Once the two year rule is removed, a seller will be able to sell a short lease property without having to start off the lease extension process. The buyer can simply kick things off when they are ready, arrange their own valuation and oversee the negotiations as to the lease premium.
Again, any discounts on the purchase price in lieu of this will be a matter for negotiation and it may be that a buyer will wish to have a lease extension valuation prior to purchasing, to understand the likely outlay once the premium and legal/valuation costs are accounted for.
Will the old process still be relevant?
In some cases, yes. It may be the case that a buyer insists on the lease extension process being initiated by the seller, either to appease a mortgage company's requirements or to give peace of mind that the freeholder has already served a counter notice accepting the claim.
Solicitors working in this area will still need to handle cases involving the assignment of the benefit of a section 42 notice for these reasons.
The change stands to benefit those looking to buy or sell a leasehold property with a lease that requires an extension of the term, and those affected parties should watch for further government announcements in early 2025.
Ricky Coleman is a leasehold solicitor and writer at legal blog Peppercorn Law
