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When will the two year rule for lease extensions be removed?

Jan 1

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Anyone researching a lease extension will be aware that they must have owned their leasehold property for two years prior to being able to extend the lease on a statutory process. Voluntary deals can be attempted at any time but they are fraught with risks, and freeholders routinely take advantage of leaseholders by intentionally dragging out the process to obtain a higher premium, retained ground rents and onerous new lease clauses that may affect saleability.


The statutory lease extension process is therefore much lower risk, as you are guaranteed to obtain a peppercorn ground rent and 90 years added to the lease term. The First-tier Tribunal (property chamber) can also prevent the freeholder from introducing onerous new lease clauses as part of the process (such as high admin fees for consents or indemnity landlords costs provisions).




The problem with the two year rule

The issue can be that a seller may not be in a financial position or have the time to extend the lease before selling, and the buyer won't have two years of ownership at the Land Registry to enable them to do so. Many buyers drop out at this point because they do not wish to be part of the uncertain lease extension process, whereby the premium still needs to be negotiated with the landlord and isn't therefore known at the time the buyer completes the flat purchase.

This can mean only cash buyers are interested, significantly affecting the sale price.


section 42 notice two year rule for lease extension of flat

Your leasehold solicitor will be able to work around this but it isn't straightforward or quick. It is possible for the leaseholder to serve the section 42 notice and then:

  • exchange contracts with a clause requiring the buyer to continue with the lease extension claim on completion and pay any legal or valuation costs of the freeholder

  • enter into a deed of assignment of the section 42 notice on completion

  • serve a notice on the freeholder that the new owner has taken over the lease extension claim, with the process continuing as normal except with the new owner in charge of negotiations of the premium and completion of the lease extension

  • the new lease is then drawn up in the name of the new owner and registered at the Land Registry


Whilst this is possible and we have handled many transaction like this, some buyers will not want to enter into this arrangement. There is also a question of who pays for all of this, and whether a retainer or price reduction is necessary to cover the buyers (at this point unknown) costs.


Why the law is changing

The Government has stated that the two year rule will be removed in early 2025. This is intended to make it easier for someone to sell a flat with a short lease and allow the buyer to start the lease extension process off in their own name, therefore removing a lot of red tape and buyers and sellers.


This should also have the effect of doing away with some of the gamesmanship by freeholders and their solicitors, who sometimes seek to disrupt or deny the process, arguing that an invalid section 42 notice has been served on the basis the buyer can't fixed the issue and is often then pressured into paying over the odds to make the 'problem' go away. This can only be a good thing.


Conclusion

From 2025, it will be possible to extend a lease without two years of ownership. If you are looking to sell a flat with a short lease or problematic ground rent, such as a doubling ground rent or RPI ground rent, things are about to get a lot easier in terms of being able to sell to a buyer willing to correct these problems after completion.

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