Freehold owners and Section 42 Notices

You are the freeholder of a building, and you receive a Section 42 Notice from one of the leaseholders – so, what do you do now?

A Section 42 Notice is a formal request from a leaseholder to extend their lease; it is given pursuant to the Leasehold Reform, Housing and Urban Development Act 1993 and entitles a leaseholder to an additional 90 years on top of their remaining lease term, and the reduction of their ground rent to a peppercorn. The Notice should propose a premium, or price, for the grant of this extended lease, and you will be able to negotiate this to secure a suitable figure, preferably with the assistance of a suitably qualified valuer.

As the freehold owner, you may be inclined to think that you can just ignore this notice – after all, you are the master of your sea – or respond by letter, email, or just pick up the phone to the leaseholder and agree a price. But, the law anticipates this; if you ignore a Section 42 Notice or fail to reply to it in the correct way, the consequences are dire. You will find yourself bound to grant the leaseholder a lease on the terms that they have proposed – you will lose all control over the price to be paid, and the terms on which the extended lease is granted. In short, the leaseholder could be lucky enough to gain an extension worth, say, £10,000 for a much lower amount which they have included in their Section 42 Notice, leaving you out-of-pocket, and, short of spurious human rights arguments, there is very little that you will be able to do about it. 

The legislation is complex, full of snares for the unwary freeholder – with just one simple error, all of your rights under the legislation could be lost. For that reason, it is imperative that the importance of a Section 42 Notice is not overlooked; if you receive one, you should take advice from a specialist leasehold enfranchisement solicitor, rather than attempt to navigate this area of law unaided. 

Practically, then, how can you avoid losing your rights as landlord? The simple answer is, ‘Make sure you reply to the Section 42 Notice!’ But as always, it is never as simple as just writing to the tenant and informing them that you do not accept their propositions. Your response must be made by way of a Section 45 Counter Notice; helpfully, the legislation does not dictate a required form for your reply, but it does specify certain things that your Counter Notice must include.

1. Firstly, it must state if you admit that the leaseholder is entitled to a lease extension, or not. 
2. Secondly, it must specify which, if any, of the proposals made by the leaseholder are accepted – normally, for example, you would accept those proposals to which the leaseholder is entitled under the legislation, so an extra 90 years on their lease, and a peppercorn ground rent. 
3. Thirdly, the Counter Notice must specify an address in England and Wales at which further notices under this legislation can be served on you – this would usually be the contact details for the solicitor representing you. And finally, just to add a little bit of time pressure into the mix, all of this must be done before the deadline stipulated by the leaseholder in their Section 42 Notice (which must be at least two months).

If these three requirements are met, then, provided that the Counter Notice is correctly served before the deadline, the power to negotiate terms favourable to you is in your hands. You might get lucky yourself; your solicitor might discover that the leaseholder has served an invalid notice, which may get you out of granting a lease extension at all – or, at least, for the time being.

For further information please contact a member of Birketts’ Leasehold Enfranchisement Team. Law covered as at January 2019.