Round #1127

Leaseholder of a one-bed flat in a converted house in Brighton acquired the leasehold on 1 March 2018 with 84 years then unexpired (current unexpired term 79 years as at the proposed claim date 1 May 2025). Leaseholder served a section 42 notice under the Leasehold Reform Housing and Urban Development Act 1993 on 1 May 2025; the freeholder has counter-noticed with a premium of £36,000. Leaseholder's valuer puts the premium at £14,500. What is the position on (a) the threshold to claim and (b) the route to challenge the premium?

# Leasehold Enfranchisement – Section 42 Notice Analysis ## Preliminary: Applicable Legislation The claim is governed by the **Leasehold Reform, Housing and Urban Development Act 1993** ("the 1993 Act") as amended, including by the **Leasehold Reform (Ground Rent) Act 2022** and the **Leasehold and Freehold Reform Act 2024** ("LAFRA 2024"). However, it is critical to note which provisions of LAFRA 2024 are actually **in force** as at 1 May 2025. > **Important caveat:** LAFRA 2024 received Royal Assent on 24 May 2024 but the majority of its substantive provisions (including abolition of the two-year ownership rule and valuation changes) require commencement orders. As at the proposed claim date of 1 May 2025, most valuation reforms under LAFRA 2024 are **not yet in force**. The analysis below applies the **1993 Act in its pre-LAFRA 2024 amended form** unless stated otherwise. --- ## (a) Threshold to Claim – Is the Leaseholder Entitled? ### Qualifying Conditions under s.39 & s.5, 1993 Act The leaseholder must satisfy four principal qualifying conditions: ### 1. Long Lease The lease must be a **long lease** – defined under s.7 as a lease granted for a term **exceeding 21 years** (s.7(1)(a)). ✅ - Original term: 84 + (7 years elapsed to March 2025) = **91 years** at grant (broadly; the unexpired term at acquisition was 84 years on 1 March 2018, so the original term was approximately **91 years**). - This plainly exceeds 21 years. ### 2. The Property Must Be a Flat A **flat** under s.101 means a separate set of premises forming part of a building, constructed or adapted for use as a dwelling, with structural elements above, below or to the side shared with other parts of the building. ✅ - A one-bedroom flat in a converted house will almost certainly satisfy this definition. ### 3. Low Rent Test Under the **original 1993 Act** the low rent test applied (broadly, annual rent not exceeding two-thirds of the letting value). However, this test was **abolished** by s.166 of the **Commonhold and Leasehold Reform Act 2002** for leases granted on or after 1 April 2003 and subsequently extended. - The lease here was **acquired on 1 March 2018** – the grant date would need to be checked, but on virtually any modern lease post-2003, the low rent test is **disapplied**. ✅ (assumed satisfied/inapplicable) ### 4. Two-Year Ownership Requirement (s.39(2)) Under the **unamended 1993 Act**, a qualifying tenant must have held the lease for **at least two years** before serving a s.42 notice. - **Acquisition date:** 1 March 2018 - **Notice date:** 1 May 2025 - **Period of ownership:** approximately **7 years 2 months** ✅ The two-year rule is comfortably satisfied. > **LAFRA 2024 note:** LAFRA 2024 s.14 *will* abolish the two-year rule entirely when commenced, but this is not yet needed here given 7+ years of ownership. ### 5. The "Excluded Interests" Carve-out (s.5(1) / Resident Landlord) Under **s.10** of the 1993 Act, there is an exception where the freeholder is a **resident landlord** in a converted building containing no more than four units. This is potentially relevant given this is a **converted house in Brighton**. **The resident landlord exclusion (s.10) requires:** - The building is a **conversion** (not purpose-built); ✅ (converted house) - The freeholder/landlord **occupies another flat in the building as his only or principal home**; - The building contains **no more than four flats** (in a conversion); - The landlord has resided there for the last **12 months**. **This is a critical point the leaseholder must investigate.** If the freeholder lives in another flat in the converted house and has done so for 12+ months, the **leaseholder's right to a new lease could be barred** entirely under s.10. On the facts as given (no mention of resident landlord), it is assumed this exclusion **does not apply**. ✅ ### 6. Conclusion on Entitlement **The leaseholder appears to be entitled to claim** a new lease under s.42, subject to confirmation that: - The resident landlord exception (s.10) does not apply; - The property satisfies the definition of a flat under s.101; - The lease was originally granted for more than 21 years. --- ## (b) Route to Challenge the Premium ### The Statutory Process: s.48 Counter-Notice The freeholder has served a **s.48 counter-notice** admitting the right (or, if admitting, proposing terms). The parties are now in a **negotiation window**. ### Step 1: Negotiation Period Following service of the s.48 counter-notice, the parties have a period for negotiation. The 1993 Act provides **two months** from the date of the counter-notice during which the parties may seek to agree the premium and other terms (s.48(7)). The leaseholder is not obliged to make a further application immediately. ### Step 2: Application to the First-tier Tribunal (Property Chamber) If terms (including the premium) **cannot be agreed**, either party may apply to the **First-tier Tribunal (Property Chamber)** ("FTT") to determine the terms of acquisition, including the premium. **Key statutory provision:** **s.48(4)** and **s.48(7)** of the 1993 Act; and the FTT's jurisdiction derives from **Schedule 12, paragraph 1** of the 1993 Act as amended. **Time limits (critical):** - The application to the FTT must be made **within six months** of the date of the s.48 counter-notice (s.48(7)). - If no application is made within this period, **the s.42 notice is deemed withdrawn** and the leaseholder cannot serve a further s.42 notice for **12 months** (s.48(8) – the "moratorium"). > **Practical point:** The leaseholder must **not allow the six-month window to expire** without either agreeing terms or issuing FTT proceedings. ### Step 3: FTT Valuation The FTT will determine the premium in accordance with **Schedule 13** to the 1993 Act. The premium comprises three components: #### (i) Diminution in Value of the Freeholder's Interest The reduction in the present value of the freehold arising from the grant of the new lease (90-year extension + existing term, at a peppercorn rent). This involves: - **Capitalisation of ground rent** (loss of ground rent income during the unexpired term); - **Reversion value** (the freeholder's loss of the right to recover the property at lease expiry). #### (ii) Marriage Value (s.Sch.13, para.4) The share (minimum **50%**) of the **marriage value** – the uplift in the total value of the property interests arising from the merger of the extended lease into the leaseholder's interest. **Crucial point – 80-year threshold:** - Where the **unexpired term exceeds 80 years**, marriage value is **nil** (Schedule 13, para.4(2)). - Here the unexpired term as at the valuation date (1 May 2025) is **79 years** – i.e., **below 80 years**. - **Marriage value will therefore be payable.** This is likely the principal reason for the significant divergence between the parties' valuations (£14,500 vs £36,000). The leaseholder should be advised that **delaying the claim even slightly below 80 years has triggered marriage value liability**, substantially increasing the premium. This is now irreversible for this notice. **LAFRA 2024 Note:** LAFRA 2024 proposes to **abolish marriage value** entirely. When (and if) that provision is commenced, this will no longer be an issue for future claims. However, **as at 1

## Position on the Section 42 Notice ### (a) Threshold to Claim The leaseholder **qualifies to serve a section 42 notice** and all threshold conditions appear satisfied: **Qualifying tenant condition (s.39(3) LRH&UDA 1993)** The leaseholder holds a long lease (originally granted for a term exceeding 21 years) of a flat. That is met on the facts. **Two-year ownership condition (s.39(2))** The leaseholder must have owned the leasehold for at least two years immediately before the notice date. The lease was acquired 1 March 2018; the notice was served 1 May 2025 — over seven years of ownership. Condition met. **No "exempt landlord" or collective enfranchisement bar** A converted house containing flats does not of itself prevent individual lease extension. There is no suggestion the freeholder is a charitable housing trust or other exempt body. No bar apparent. **Unexpired term** There is no minimum unexpired term required to claim (the two-year ownership rule replaced the former 21-year floor). At 79 years unexpired the notice is valid. Note, however, that with under 80 years remaining, **marriage value becomes payable** in the premium calculation (s.56(2) and Sch.13 para.4) — this is directly relevant to part (b). **Form and content of the notice** The s.42 notice must be in the prescribed form (SI 1997/640 as amended), specify the proposed premium (here £14,500 as the leaseholder's valuation), the new lease terms proposed, and the nominee purchaser. Assuming those formalities are complied with, the notice is valid and the freeholder's counter-notice under s.45 (served within two months) is in time and engages the statutory negotiation period. --- ### (b) Route to Challenge the Premium **The gap: £14,500 (leaseholder) v £36,000 (freeholder)** The divergence at sub-80 years is typical: marriage value (the uplift in the flat's value attributable to the extended lease) is obligatorily included and split 50/50 between the parties under Schedule 13 para.4. Freeholders' valuers frequently apply higher deferment rates, higher capitalisation rates, and a larger marriage value share to inflate the premium. The leaseholder's valuer should check: - Deferment rate applied (post-*Sportelli* [2007] the conventional rate is **5% for flats**; any material departure requires justification). - Ground rent capitalisation rate. - Relativity (the ratio of the unextended leasehold value to freehold value) — disputed relativities are the single most common source of large gaps at this lease length. - Whether any development value or hope value has been loaded in without proper evidence. **Step 1 — Statutory negotiation period** Following the counter-notice, the parties have **two months** from the date of the counter-notice (s.48(3)) in which to agree the terms, including the premium. Active without-prejudice negotiation between valuers should proceed immediately. **Step 2 — Application to the First-tier Tribunal (Property Chamber)** If terms are not agreed within the two-month period, the leaseholder **must** apply to the **First-tier Tribunal (Property Chamber) — Residential Property** under **s.48(1) LRH&UDA 1993** for determination of the premium and any other disputed terms. The application must be made **before the end of six months** beginning with the date of the counter-notice (s.48(3)); failure to apply within that window results in the s.42 notice being deemed withdrawn and the leaseholder being barred from serving a further notice for **12 months** (s.42(7)). **Critical deadline on the facts** Counter-notice received in response to a 1 May 2025 notice: assuming the counter-notice was served on or around the last day of the two-month response period (i.e. approximately 1 July 2025), the FTT application must be issued by **approximately 1 January 2026**. The leaseholder should not allow negotiation to run down the clock; issue the FTT application in good time. **Step 3 — FTT procedure** The FTT will determine the premium on Schedule 13 principles. Both parties file valuation evidence; a surveyor member of the tribunal usually sits. Costs do not follow the event in the FTT in the ordinary way — each party bears its own costs unless unreasonable conduct is shown (Tribunal Procedure (First-tier Tribunal)(Property Chamber) Rules 2013, r.13). The freeholder's legal and valuation costs of the *grant* of the new lease (not the dispute) are recoverable from the leaseholder as a matter of statute (s.60), but the leaseholder's own FTT costs are not recoverable from the freeholder absent misconduct. **Step 4 — Upper Tribunal / Court of Appeal** An appeal on a point of law from the FTT lies to the **Upper Tribunal (Lands Chamber)** with permission, and thereafter to the Court of Appeal. --- ### Practical summary | Issue | Position | |---|---| | Right to claim | Established; all conditions met | | Marriage value | Payable (sub-80 years); split 50/50 | | Dispute mechanism | FTT (Property Chamber) under s.48(1) | | Outer deadline to issue FTT application | 6 months from counter-notice date | | Consequence of missing deadline | Notice deemed withdrawn; 12-month bar | | Costs at FTT | Own costs unless unreasonable conduct | The leaseholder should instruct a RICS-accredited leasehold valuation surveyor experienced in Brighton comparables to review the freeholder's valuation in detail — particularly the relativity figure and deferment rate — before deciding whether to negotiate further or proceed directly to the FTT.