Understanding the Deferment Rate

• The deferment rate plays a significant role in lease extension valuations. It is the investment multiplier applied to the future value of the property once the lease has expired. In 2005, the Aribib case set new standards, suggesting that a deferment rate of 4.75% for lease extensions and 4.25% for freehold enfranchisement cases should be applied. This change was a significant shift from the previous rates of 6% to 8%, especially considering how property values can vary.

Impact on Leasehold Valuations

• A significant drop in the deferment rate leads to a noticeable difference in valuation, especially for flats with unexpired leases. For instance, for a £150,000 flat with 68 years unexpired, at an 8% deferment rate, the value to the freeholder would be £800, whereas, with a 5% rate, it would be £5,435. The reduction in deferment rates had a profound impact on the value calculation for lease extensions, making it crucial to understand how the market and location factor in.

Post-2005 and the Cadogan vs. Sportelli Decision

• The market shifted again in 2006 after the Cadogan vs. Sportelli case, where the Lands Tribunal directed valuers to apply a 5% deferment rate for flats and 4.75% for houses. This became a standard for all Leasehold Valuation Tribunals, marking a pivotal change in how leasehold extensions are valued. Since then, the deferment rate has remained consistent in such cases.

Complexity in Lease Extension Valuation

• Lease extension valuations involve 13 key input factors, including the length of the lease and the skill of the valuer. While some aspects are clearly defined, the valuer still plays a vital role in determining the extension cost. Even after serving a Section 42 notice, the deferment rate continues to impact the valuation process, making it essential for leaseholders to understand how their specific case will be handled.

Impact on Property Sales

• Shorter leases can significantly affect property sales. Most agents report a decline in sale prices and fewer buyers once a lease falls below 85 years. This makes lease extensions a necessity for many property owners, as an expiring lease can impact both the property's value and the ability to sell it in the future.

Recent Legal Changes and Benefits for Lessees

• Over the years, several legal changes have benefited lessees. These include:
  • Limiting the landlord’s claim to no more than 50% of the marriage value (the increased value from extending the lease).
  • In 2002, marriage value was reduced to zero for leases with more than 80 years unexpired.
  • The residency requirement was abolished, meaning lessees no longer had to live in the flat for three consecutive years.
  • Lease extensions can now be claimed by non-UK residents or companies owning the flat.
• These reforms have made leasehold extensions more accessible and affordable for leaseholders.