David Whitney of Painsmith Solicitors: How Are Lease Extensions Valued?

For most people the only property valuations they have come across relate to the selling or purchasing of their property. Whilst they are obtained at a low cost and seemingly straight forward, sadly the same cannot be said of leasehold valuations under the Leasehold Reform Housing and Urban Development Act 1993. Leasehold Life is very pleased to publish a succinct overview of the 3 elements that comprise this type of valuation from Solicitor David Whitney of Landlord and Tenant specialist law firm (and ALEP member) Painsmith Soliciitors. David also contributes to the PainSmith Landlord and Tenant Law Blog. 

1) GROUND RENT

Most leases provide that you will have to pay a sum of money on an annual basis for the length of the term to the Freeholder.Under a 1993 Act extension the ground rent reduces to a “peppercorn” which means a nominal ground rent only is payable.  The Landlord is entitled to be compensated for losing this sum.

Basically you work out how much ground rent in total the Freeholder would receive over the remainder of the current term. You then calculate what someone would pay today on the basis of getting that total ground rent.This is the first tricky calculation that relies on the valuers magic and the first part of the money you need to pay.

2) LOSS OF VACANT POSSESSION AT THE END OF THE TERM

The second part always payable relates to the fact that under the existing lease, technically at the end of the term, the Freeholder would get back vacant possession of the flat. If the 90 year extension under the 1993 Act is granted, he will not get the flat back.

The starting point is therefore to work out what the value of this would be to the Freeholder at the end of the term but on todays prices.  Again the valuer then has to work their magic to calculate what price someone would pay for that potential sum of money today. Obviously this will be a lot lower sum to take account of the time taken before the Freeholder will obtain this vacant possession.

These first two elements are payable in all lease extensions claims.

3) MARRIAGE VALUE

Since the Commonhold and Leasehold Reform Act 2002 amended the 1993 Act it has provided that marriage value is only payable if there are 80 years or less remaining on the lease term with the marriage value payable to the Freeholder now fixed at 50%.This is why you will often see reference to 80 years being vitally important as the inclusion of marriage value can substantially increase the premium payable to the Freeholder.

But what is marriage value?

Again this is a strange concept. Some people say it is purely hypothetical but be that as it may it is required to be paid!

If you imagine that both the freehold and the leasehold have a value which can be calculated (and is). If however you bring the freehold and leasehold together and merge the two, the sum of their parts will usually be greater than their individual values. It is this uplift in value which is marriage value and this is then split, giving the Freeholder 50% of this sum.

Technically other sums could be payable to compensate the Landlord for other losses such as loss of potential redevelopment, however these are rare.

SUMMARY

In conclusion I hope this provides a useful summary of the sums payable. It is an overview and cannot be a substitute for proper advice which should always be sought from a Valuer with real experience in the field. As can be seen there are various different calculations and matters which need to be considered, hence why expert advice is a must. It is important that careful consideration is given to all the factors and if you think your lease is getting close to only 80 years remaining, do think about extending in advance as it can save you a lot of money!

For further information on this and any other leasehold matter please contact:

David Whitney

Solicitor

Direct dial 01420 565319
Mobile 0792 1365654

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