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What's in a lease extension valuation?

To get your head around this you need to understand that whilst your lease is valuable to you today, at whatever you could sell it at in the market place, your lease is also valuable to the Freeholder who

  1. receives investment income from it (the ground rent)
  2. has the hope value of a premium from you (for buying a lease extension) and
  3. holds the reversionary interest (the value of a vacant flat in XX years time)

This is a specialist area of valuation that needs some understanding as the valuation methodology involves the following elements:

  1. Market value of the flat
  2. for flats with less than 80 years unexpired on the basis of

    1. a short lease with ground rents payable as covenanted under the lease
    2. a long lease with peppercorn ground rent payable (existing term + 90 years)
  3. the value of the landlord's interest
    1. ground rent receivable as covenanted under the lease
    2. present value of the reversionary title (a vacant flat with long lease) once your lease has expired
  4. Marriage value ie, the difference between 1(a) and 1(b)

Understanding valuation science

The science of valuation enables us to calculate the "present value" of the future right to your vacant flat and enables us to value the ground rent (an income stream for a term of years.

The valuer will consider market evidence and settled caselaw to select the appropriate capitalization rate upon which to base our valuation of the ground rent. In simple terms this could be a rate derived from or comparables such as gilts yields (gilts are government bonds), interest rates paid on bank credit balances, the bank base rate + a premium for the perceived risk of investing in property etc.

He/she will select the appropriate deferment rate by which it is reflected that the reversionary value to the landlord is some years away.

There are arguments that the capitalization rate for ground rent payable to an intermediate landlord should be capitalized at a different rate to ground rent payable to a Freeholder. We can talk you through such arguments, but essentially it all relates to the perceived quality of each as a provider of investment income.

The valuers will draw from market evidence and settled caselaw the improvement rate which is the percentage by which the value of the flat would increase from being granted a statutory 90 year lease extension. This is subjective and probably the most argued point at First Tier Tribunal. Negotiation factors will be the length of the lease unexpired lease as opposed to the length of a typical lease in the area. For example, in Knightsbridge where short leases are common place it could be argued that the improvement rate would be less than where short leases are uncommon.

Remember, since July 2003, the improvement rate is 0% if your lease has more than 80 years unexpired! This means you compensate the Freeholder for the loss of ground rent but do not have to pay marriage value.

What we need to do a valuation

  1. A copy of your lease as this will set out the ground rents covenanted during the term.
  2. To inspect the flat and understand the context of the building in which it is situated.

The Leasehold Guidance Service is part of the Ringley Chartered Surveyors therefore a Chartered Surveyor will carry out the valuation for you.

Our valuation report includes a full commentary on

  • comparable evidence to support our opinions
  • analysis of how we select the investment yield
  • recent court decisions re: marriage value (the difference in value between a short lease and a virtual freehold)
  • advice on what you should serve as the price on your initial notice

Cases where there is an intermediate landlord

Where due to an intermediate interest such as a headlease we have to consider additional valuation factors under paragraph 8(1) of Schedule 13, or paragraph 8(3) such as where an intermediate interest receives a profit in ground rent or has a reversionary interest of more than 5 days it may be required to be valued as a wasting asset which would according to case law require a sinking fund and tax to be allowed for. Valuing an intermediate interest adds an additional £150 to our standard fee structures.

Our fees reflect the amount of research necessary to fulfill the valuation methodology set down in law and to enable us to provide you with not only a valuation but elemental reasoning behind each part. From all this we are able to piece together the eventual "valuation" "premium that should be paid".

How much cost

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