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What costs will I incur when extending my Lease?
A Flat Owner’s right to extend their lease is contained in Part II of the Leasehold Reform, Housing and Urban Development Act 1993 (“the 1993 Act”), specifically section 39. The exercising of the right is not dependant on the remaining length of the lease. For example, if a prudent and well-organised Flat Owner wanted to extend their lease even though it still has 95 years left to run then they are perfectly free to do so.
When starting a claim it is vital that the Flat Owner instructs a specialist solicitor to act in the process as they become liable for the freeholders costs from the moment the Claim Notice (“the s42 Notice”) is served, and they remain liable for such costs all the while that they assert that a valid Notice is in existence.
So what costs is a Flat Owner actually liable for?
Under section 60 of the 1993 Act the Flat Owner is responsible for the freeholder’s reasonable legal and valuation costs associated with the granting of a new lease. If the parties cannot agree the costs then the First-Tier Property Tribunal has jurisdiction to determine what the Flat Owner shall pay.
In addition to the above, the Flat Owner will also have his/her own legal and valuation costs and negotiation costs. Further, if the premium is over £40,000 (which is unlikely outside of London) then the Flat Owner will also be liable for Stamp Duty Land Tax.
Any prudent leaseholder should consider budgeting as a preliminary issue and so should contact Solicitors and Surveyors to enquire as to their level of fees. There are many online resources (LEASE, Association of Leasehold Enfranchisement Practitioners, Flat Living, News on the Block etc) that can point a Flat Owner in the right direction of suitably qualified professionals.
As a general estimate, a Flat Owner can expect their own costs to be in the region of £3,000 plus VAT and should expect the freeholder’s costs to be in the same ball park. Additional fees may be incurred where there is a Headleaseholder or third-party to a lease.
Any Flat Owner looking to embark on the process should also consider the potential for Tribunal costs, or, more rarely Court Costs. In the event that an application to the Tribunal becomes necessary the Flat Owner will find that the costs of this are generally not included within the fixed fee estimates given by solicitors and surveyors. In some instances an application is unavoidable, and indeed necessary to preserve the Flat Owner’s right to be able to extend his/her lease at the time.
Generally speaking Tribunals like to think of themselves as less formal than the Court system. However, that said, there is a considerable amount of formality and specialist knowledge is required to properly make and manage a claim in the Tribunal, a Flat Owner would be very ill advised to try and go this alone, even when considering the potential cost savings. The Tribunal only hears property related matters and the Panel who sit are experts in their field and so they are qualified to hear the legal and valuation evidence put to it, and to decide on the issues in dispute. The Tribunal is unable assist a Flat Owner is presenting his/her case; it cannot cross-examine the freeholder’s valuer on his evidence; it cannot present evidence to itself on issues of valuation or the law, despite being familiar with, and having expert knowledge of, the same. To do so would be unfair to the freeholder.
A Tribunal application may incur considerable cost that was not initially budgeted for. As a general guide, taking a case to Tribunal can cost in the region of £4,000 - £7,000 plus VAT per day for a full hearing.
In practice, very few cases result in an application to the Tribunal. As a general rule of case management we would insist that a protective application is made if negotiations are delayed for any reason. The initial application fee, following the price rise in July 2016, is now £100 and is an absolute must for all Flat Owners where the new lease negations are slow and no agreement has been reached within three to four months of the Counter Notice being received. The vast majority of these applications never even make is to the Hearing stage as negotiations conclude matters but that initial additional outlay is vital.
Very few cases (less than 1% of all applications made) make it to a full blown Hearing. From a commercial-reality point of view, it is not worth incurring such considerable cost unless the sums in dispute are at least double the likely costs of the Tribunal process, otherwise the Flat Owner is likely to have a paper victory but be left considerably out of pocket by the whole process.
There are provisions that allow the Tribunal to make a costs order against the opposing party, but these powers do not follow the common ‘loser pays the winners costs’ cost consequences that feature in the Court system. The Tribunal are only usually persuaded to issue a costs order in circumstances where the opposing party, or their representatives, have behaved with unreasonable conduct.
The point to remember on costs is that they are not on a sliding scale linked to the lease length; the procedural fees apply regardless and so Flat Owners would be well advised to start the lease extension process early to avoid a hefty premium on top of the additional costs, which may make the process prohibitive, leaving a Flat Owner stuck between not being able to afford to extend the lease and the flat become unmortgagable, and hence unsaleable, in the future due to the short lease.