9th July 2020

Is calculating the premium of a lease extension a straight-forward matter?

Under the Leasehold Reform Act 1993, a qualifying lessee is entitled to a 90-year extension subject to a premium payable to the competent landlord.

The Leasehold Reform Act 1993 provides the qualifying tenant of the flat the right to a lease extension of a term of 90 years additional to the unexpired term, at a peppercorn ground rent. The premium payable is in effect the aggregate of four components:

i. Value of the ground rent
ii. Value of the reversion
iii. 50% of the marriage value
iv. Any other compensation

Value of the Ground Rent

The ground rent represents an income stream for the Landlord. Following a statutory lease extension, this income stream will be lost as the new ground rent payable will become a peppercorn. The value of the existing rent is assessed as a capital sum by reference to the size of the rent, nature of any reviews, length of time and the capitalisation yield rate. As part of the process a valuer would assess the ground rent relative to any rent review patterns. Then an appropriate capitalisation rate is applied depending on whether the ground rent is fixed for the duration of the term, has set increases or if the ground rent is subject to RPI indexation.

Value of the reversion

At the end of the term, the property will revert to the Landlord. As a result of the lease extension, the reversion will be delayed by an additional term of 90 years. This delay is valued as a capital sum by reference to the current unexpired term, unimproved freehold value and the deferment rate.

The valuation of the property is not always straight forward. What is the current condition of the property? Has the lessee altered the premises? Has landlord’s approval been obtained? or what are the reinstatement provisions within the lease? These are some of the questions that need to be reviewed and considered by the valuer to come to an accurate valuation which in return will give an accurate estimation of the premium payable.

Marriage Value

With effect from 26th July 2002 the Commonhold and Leasehold Reform Act 2002 states that the marriage value is fixed to 50% between the Freeholder and the Lessee. The same Act stipulates that marriage value needs to be disregarded when leases have more than 80 years unexpired term.

For leases with less than 80 years unexpired, the relativity is the percentage difference of the value of the property with the current term unexpired and the value of the property with an extended lease. This can be assessed using market evidence of transactions with similar lease terms, settlement with other valuers, previous Tribunal decisions and the use of relativity graphs. Most times there is a lack of comparable evidence of units with similar lease terms and as such valuers refer to the graphs to determine relativity. With a significant number of relativity graphs available, the valuer needs to have the appropriate experience to be able to determine the appropriate graph to be used.

Other Compensation

The valuer needs to have the relevant expertise to determine if the landlord is entitled to any additional compensation and be able to identify such entitlement as well as to quantify this.

Conclusion

Calculating the premium payable for a lease extension is not as straight forward as people may think. An online calculator may not give you an accurate premium estimation and the employment of a good, experienced and knowledgeable valuer is recommended.

If you would like to discuss your lease extension, please contact Panicos Loizides on 020 7813 9155 or pl@questpc.co.uk