Author: LV-Admin

The premium is arrived at by using the following parameters:

• The capitalization rate
• The deferment rate
• The relativity

The value of the property (either short lease value or long lease value – or preferably both)

Ground rents payable throughout the term of the existing lease taking note of how often they change.

Each of these parameters have been explained in detail in the previous blog.

One other parameter which can sometimes be very important is the valuation date

What is the valuation date?

The valuation date is the date that the section 42 notice is served on the landlord by the leaseholder. The valuation date is important because this date determines the lease length remaining when the leaseholder requests the extension and also the date that comparable evidence should be based around. It becomes very important when the remaining lease length is approaching 80 years and increasingly more important once it drops below 80 years.

The 80 year threshold is the point at which “Marriage Value” becomes payable to the landlord, in addition to any premium. The marriage value is explained below but it is important to point out that in some cases the marriage value can increase the total premium payable to the landlord significantly.

What is marriage value?

The marriage value is basically the difference between the sum of the values of each of the interests in the property after the extension has taken effect LESS the sum of the values before the extension was even applied for. This value is shared between the freeholder/landlords and the leaseholder. The leaseholder receives 50% of the marriage value and the other 50% is apportioned between the superior leasehold interests  such as intermediate lease(s) and the freeholder. The apportionment is decided, based upon the various interests under each superior interest.

Marriage value is very well explained on the following webpage.

https://www.lease-advice.org/lease-glossary/marriage-value/

The purpose of the valuation is to calculate how much compensation the leaseholder needs to pay to all superior interested parties, for the loss they will incur, in order to be able to extend their lease by an additional 90 years and reduce the ground rent to effectively NIL.

For this to be calculated the total value of holding the lease as an investment for the superior owners needs to be calculated.

The ground rents are discounted at the capitalisation rate and the freehold value of the flat at the deferment rate.

The same calculation is undertaken on the existing interests.

As this is a very difficult concept to comprehend (and to explain simply) perhaps an example of a valuation may help:

 

The above is a very simple valuation with a lease that has more than 80 years remaining and so there is no marriage value payable. But it allows you to see how all of the parameters previously described fit together to form the valuation and how each affects the overall premium.

When marriage value and intermediate leasehold interests are introduced into the mix then the valuations become quite complex. Also, when the reviews of the ground rents are not fixed for the whole period (and so change during the term) or when they are linked to a formula such as the RPI then matters get even more complicated.

In this blog we will be highlighting the figures that form part of the overall premium calculation and explain what each are and how they contribute to the overall level of premium.

The main figures that contribute to the level of premium calculation are:

Capitalisation rate – This is essentially the percentage rate that an investor would be willing to accept, by way of return, if he were to invest in a security providing this level of income.

So, for example, if an investor was offered an income of say £50 per year for life, how much return would he want in return for purchasing this investment? Generally the lower the income the higher the return an investor would expect. Therefore, by comparison an investment offering say £100 per year for life would command a lower percentage return than the previous example.

Deferment rate– This is the rate at which a future value should be discounted to the present day to calculate what that value would be worth today.

For example, if a property had a lease of 50 years remaining on it then in theory the landlord will receive the property back in 50 years’ time and he could then do whatever he liked with it. Let’s assume this same property was estimated to be worth £100,000 in 50 years’ time. If the landlord wanted to sell this property to somebody else today so that they would then receive the property back in 50 years’ time an investor would not pay £100,000 now, as he would effectively make no profit on the resale in 50 years’ time (and in fact will lose money if inflation is taken into account). So the deferment rate reduces the future value of the money by an appropriate percent to allow for what an investor is likely to pay.

The deferment rate has a hugely significant effect on the level of premium and so is very important. Due to its significance there has been much case law in this area and it has now been decided that generally the deferment rate for flats is 5% and for houses it is 4.75%. However, there has also been caselaw where slightly different rates have been applied and so it is important to seek professional advice.

Relativity – This percentage rate is also hugely significant to the overall level of the premium. The relativity is basically the percentage that a property with a lease of less than 80 years would be in comparison to the same property with a lease of more than 80 years remaining.

This is probably the matter that causes the most disagreement between the landlord’s and leaseholders’ surveyors.

A number of graphs of relativity have been produced by various surveying firms over the years but there is still no consensus on exact values. Although relativities are similar for properties with similar lease lengths remaining they are usually within a range of values which is what causes the disagreements. There are also different values for properties within Prime Central London and outside which also causes further problems when negotiating as it can be very subjective as to which graph(s) are relevant in any particular situation.

Value of property – There are two values that are important here. The value of the property with a long lease (in excess of 80 years) and the value of the property with a shorter lease (less than 80 years). Ideally it is best to find comparable evidence for both of these levels, in order to support the valuation, but in reality it is very rare to do so. This is why the relativity is so important, as providing one of these values is known, then the relativity can be used to calculate the other value.

It should also be noted that under the relevant legislation – “Leasehold Reform, Housing and Urban Development Act 1993” for flats and “the Commonhold & Leasehold Reform Act 2002” for houses – any improvements undertaken at the leaseholder’s expense should be discounted from the value of the property. This is where the valuation for lease extension purposes differs to an estate agent’s valuation. An agent will value the property as it stands, with all fixtures and fittings, whereas a surveyor valuing for extension purposes must disregard any such improvements and the property should be assumed to be in a reasonable, habitable condition.

Ground rents – This is what the leaseholder pays the landlord each year as rent. It is not the same as the service charge. It may stay the same for the whole term of the lease or it could change regularly. As an example, the ground rent may be £50 for the first 33 years, £100 for the next 33 years and £150 for the final 33 years. Another example is that the ground rent could change according to a formula. For example the rent could change every 25 years by RPI.

Marriage value – This is an additional value added to the premium if the remaining lease length is less than 80 years. It does not apply to lease in excess of 80 years. Basically it is the difference between the values of the leasehold and freehold interests in the property after the proposed extension and the situation before the extension.

The leaseholder has to pay the freeholder (and if applicable the headlessee(s)) something (known as the premium) to compensate them for the loss of their investment.

This is better explained as follows:

The freeholder purchased the property as an investment in order to make money. They initially received the purchase price of the flat, when they first sold the original lease on the flat. The headlessee would have the same reasons for purchasing a lease from the freeholder and then sub leasing to the leaseholder. The price the flat originally sold for would have reflected the length of the lease (a longer lease of say 999 years being more expensive than one of say 99 years). As such the freeholder and headlessee would have expected the flat back after the lease expired. If they are now going to be denied the flat back at the expected date they should rightly be compensated for this as if they had sold the flats with a longer lease in the first place they would have received more money.

It is this premium that we at Leasehold valuations calculate for you and negotiate with the landlord on your behalf.

Does he just pay the freeholder or also the headleaseholder?

As explained above, anybody who has an interest in the property above the leaseholder should be compensated for their loss due to the proposed extension of the lease. The level of compensation will depend on how long they own the property for before it passes onto the next level up.

For example, in some cases once a lease ends the headlessee will only hold the property for 3 days before their lease is also extinguished and the property then reverts to the next person up the chain. In this case the headlessee will not receive much of the share of the total premium as the value of the headlease is limited (ie only 3 days so cannot let it out or sell it on). However, in some cases the headlease may continue for many more years (100+ years) in which case they could sell another lease in it or rent it out and so the proportion of the premium they receive will be much higher.

In the same way if a headlease is very long (say 999 years) then the freeholder will not get the property back for a very very long time and so he will receive a very small proportion of the premium and the parties between the leaseholder and the freeholder will get the lion’s share.

The manner in which the premium is “shared” between the relevant parties will be calculated by your valuer. This should be clearly explained and broken down in the valuation you receive.

At Leasehold Valuations we provide 3 valuations accompanied by a very detailed report which explains every aspect of the valuations to you along with some background to put it into perspective. Due to the complexity of the valuation we are always at hand to provide any further assistance we can to help you understand the valuation better along with the various options open to you. We hope this will help you make an educated decision on how you wish to proceed.

Please refer to our case studies to see how successful we have been when we have had to go to tribunal and helped our clients achieve fantastic results, in some cases saving them over £1 million but in most cases saving them many thousands.

Please contact us for free, no obligation, advice. Call: 01753 542984 or use our Contact form

There can be a number of parties involved in a lease.

At the top of the ladder is the freeholder who ultimately owns, not only the building, but also the site the building is sitting on. He/she will be the person/company who will legally eventually get the property and site back when all of the leases have expired. Of course in reality the leaseholders will probably keep extending their leases whenever possible and so the freeholder may never actually get the property back.

The next rung down in the ladder is the headlease. This is simply a lease like any other where the lessee leases the whole building/flat/house from the freeholder.

There can then be a number of underleases, again which are like any other lease but which are each successively slightly shorter than the lease above them (sometimes by as little as 3 days or as large as many years), and then the lowest rung on the ladder is the bottom lease. It is usually this bottom lease that is requesting the lease extension.

If there are so  many people involved in the chain of ownership who can give the right to extend?

Because the leaseholder is extending his lease by another 90 years the “competent” landlord is the one who holds a lease which expires after the extended lease will do so.

So for example, if you have 40 years left on your lease you will end up with 130 years left on your lease after extension. If there is a head lease which has more than 130 years remaining on its term then only they can offer you an extended lease. The freeholder has no say.

If there were a number of leases in the chain of ownership then the first one that expires after 130 years will be the “competent” landlord.

Can the freeholder refuse to extend the lease?

In the majority of cases the freeholder cannot refuse a qualifying tenant to extend their lease.

However, there are exceptions to this rule and the most common is probably if the freeholder wishes to redevelop the property or use it for their own residence (although this is very rare). In either of these cases it is only possible for short leases.

For example a freeholder cannot claim to wish to use the property for his own accommodation if there are 50 years left on the lease. It would simply not be possible for him to prove that in 50 years’ time he definitely needs the property for his own personal needs. However, he could prove this if there was only 5 years remaining.

Redevelopment is slightly different because a freeholder could own an estate with 100’s of flats on it. In this case it may be possible for him to show an indication that in 20 years time the estate will be demolished and replaced with something else, although this would still be difficult to prove. Therefore, he could raise an objection to the lease extension when only 20 years are remaining.

This would also be the case for a very long headlease. It is not unusual for a head lease to have a 950 year term and then grant underleases for 125 years, thereby having over 800 years remaining on the lease when the underleases are due to expire. In this case the head lease could also show an indication of redevelopment of the estate in say 20 years time.

We, at Leasehold Valuations, have the knowledge, experience and much more to support you and will guide you through this process and the expertise to fight your case as vigorously as it deserves from initial valuation to the First-tier Tribunal (Property Chamber)– (if required).

Please refer to our case studies to see how successful we have been when we have had to go to tribunal and helped our clients achieve fantastic results, in some cases saving them over £1 million but in most cases saving them many thousands.

Please contact us for free, no obligation, advice. Call: 01753 542984 or use our Contact form.

This third blog in a series of blogs attempting to explain in layman’s terms the process of extending your lease, whether for a flat or house. Please see our previous blogs in this series and also all other blogs which are intended to help you understand this complex piece of legislation.

How much does it cost to extend my lease?

There are 2 main fees payable in the lease extension process. One is to the surveyor and the other is to the solicitor. However, you as the leaseholder are legally obliged to pay also for your landlord’s “reasonable costs”. So not only do you have to pay your own surveyor’s and solicitor’s costs you also have to pay your landlord’s surveyors and solicitor’s costs. These costs must be “reasonable”.

Although fees vary across regions and firms a rough estimate for surveyor’s costs would be £700 – £950. We believe “reasonable” solicitor’s costs would be in the region £700 – £1,200.

What is the process involved in extending my lease?

The process for lease extension basically is as follows: 

1.           You need to get a valuation so that you know what figure to enter in your initial notice to your landlord. The valuation is usually undertaken by a surveyor. Where an intermediate or superior lease is involved there may be an additional charge as this additional interest makes the valuation a bit more complicated.
2.           Once you have received your valuation, you need to instruct a solicitor to serve an initial notice on your landlord requesting the lease extension.
3.           Once this notice is served the landlord has 2 months within which to serve their counter notice stating at what price they would be willing to extend your lease.
4.           Once this notice has been served the surveyor then begins negotiations with the landlord’s surveyor in order to agree on a premium which will be payable to extend your lease. We have a time limit of 6 months in which to agree.
5.           Once the matter is agreed your solicitors will complete the extension.

What happens if the two surveyors cannot agree to a premium?

If agreement cannot be reached within 6 months, then either party has the right to apply to the First-tier Tribunal (Property Chamber) (formerly known as the Leasehold Valuation Tribunal) to have their case heard. A tribunal usually consists of 2-3 professionals with at least 1 surveyor and 1 legal professional both with relevant knowledge of the matters to be heard.

If the matter is referred to the First-tier Tribunal (Property Chamber) then additional fees will be payable.  

The First-tier Tribunal (Property Chamber) is the court equivalent to property related matters.

The First-tier Tribunal (Property Chamber) will firstly issue directions, with strict timescales, to both parties on what they want each of their professional advisers (solicitors and surveyors) to do. If these timescales are not adhered to the Tribunal can take that into account when asked to award costs.

Each party therefore needs proper professional advice to guide them through this maze of regulation and, firstly, to try and avoid a full hearing (thereby saving costs for their clients) but also to fight their client’s case as vigorously as possible if a full hearing becomes necessary.

Some professionals will claim to know how to deal with leasehold matters when in reality they have very little experience or knowledge.

We, at Leasehold Valuations, have the knowledge, experience and much more to support you and will guide you through this process and the expertise to fight your case as vigorously as it deserves from initial valuation to the First-tier Tribunal (Property Chamber)– (if required).

Please refer to our case studies to see how successful we have been when we have had to go to tribunal and helped our clients achieve fantastic results, in some cases saving them over £1 million but in most cases saving them many thousands.

Please contact us for free, no obligation, advice. Call: 01753 542984 or use our Contact form.

This second blog in a series of blogs attempting to explain in layman’s terms the process of extending your lease, whether for a flat or house. Please see our previous blogs in this series and also all other blogs which are intended to help you understand this complex piece of legislation.

Which legislation covers the extension of a residential lease or purchasing the freehold of a block of flats?

There have been many statutes that govern issues surrounding flats and houses over the years. The current ones that are relevant are “Leasehold Reform, Housing and Urban Development Act 1993” for flats and “the Commonhold & Leasehold Reform Act 2002” for houses.

Who can apply for a lease extension?

In order to exercise your rights under either of the above statutes you now only need to have owned (not necessarily lived in) the property for at least 2 years.

How long can I extend my lease for?

Although you are free to agree to any extended term between freeholder and leaseholder the default positions, in the absence of agreement, are as follows.

For a flat you can extend your lease for an additional 90 years (e.g if you currently have 67 years left on your lease your extended lease will end up with 157 years on it).

For a house you can extend your lease by 50 years (so using the example above your extended lease will end up with 117 years on it).

What are the qualifying criteria?

As mentioned in our first blog certain criteria have to be met in order for you to qualify to have your lease extended.

For flats:

–          You have to have owned the flat for at least 2 years;

–          Your ownership of the flat must be held  under a qualifying lease;

–          A qualifying lease is one that is for a fixed term of at least 21 years;

–          The property which you wish to extend must be a “flat” as described under the definition;

For houses:

–          You must be the tenant of the whole house unless you are already the freeholder of those parts of the house of which you are not the tenant.

–          A qualifying lease is one that is for a fixed term of at least 21 years;

–          You have to have owned the house for at least 2 years.

–          Your rent must be classed as a “low rent”. The definition of this is quite complex and so please contact us for further guidance.

What rent do I end up paying after the lease extensions?

Regardless of what ground rent you were paying before the lease extension for a flat your rent will decrease to effectively NIL.

I say effectively because under the legislation the ground rent reduces to a peppercorn which is equivalent to £1 per year but landlords very rarely charge this as it become uneconomical to do so.

For a house extension your rent will change to a “Modern rent”. A “modern rent” is the market rent as on the date of valuation for the site (not including the house or any other buildings on it).

The method of valuing this “modern rent” is extremely complicated and so please contact us for further advice if required

This is the first of a series of blogs that will try to explain, in layman’s terms, how the process to extend your lease is undertaken for lease extension purposes.

We will not cover every single type of lease nor every single possible situation, as that will simply not be possible during a short blog. However, if there are any questions you may have that aren’t covered in these blogs then please feel free to contact us for a free friendly professional consultation.

A separate series of blogs will explain the process for a freehold purchase (or enfranchisement to use the correct terminology).

In order to understand how valuations are undertaken it is necessary to understand a bit about the background, not only the process of extending your lease, but also how the law evolved to get us here and why certain processes need to be followed correctly in order to ensure a successful outcome.

The type of lease extensions we will be discussing are only the ones relating to residential properties (flats and houses) and only applicable to properties in England.

Leases of commercial premises (shops, warehouses etc) are governed by different legislation and are totally different in the way they are valued and calculated.

What is a lease?

A lease is a legal document between the landlord of a flat/house (hereinafter called the Lessor) and a tenant (hereinafter called a Lessee) that gives the Lessee a right to own the flat/house in question for a specified number of years (usually 99 years and above but it can be any length over 21 years). During the term of the lease it is quite normal to pay a ground rent, which may or may not increase periodically throughout the term.

For example, a typical lease may be for an original term of say 99 years paying £50 per year for the first 33 years and then increasing to £100 per year for another 33 years and then £150 per year for the final 33 years.

What is a lease Extension?

At any time during the term of the lease the lessee can exercise their legal right to extend the lease by an additional 90 years. So, for example, if you have 50 years left on your lease you can extend it to 140 years (50+90) and reduce your ground rent to effectively NIL for the whole 140 years.

However, before embarking on this process certain criteria must be satisfied. These criteria will be expanded on in the next blog.

In order to start the process certain notices have to be served and the landlord must be compensated for the loss to his investment (i.e. the landlord will receive less rent and also has to wait a further 90 years to get his property back).

Who pays the fees?

As the lessee is requesting the extension the legislation states that the lessee is responsible for both his/her own surveyor’s and solicitor’s fees as well as the landlord’s “reasonable” fees. We suggest you allow a budget of say £3,500 for all fees.

So, as you can see, this is not a cheap process but getting the correct professional advice from the outset is important if you want to extend the lease for as little as possible, with the least amount of complications and receive the correct advice.

Some people choose to opt for professional advisers who are perhaps cheaper but as the saying goes “you get what you pay for”.

To get the right advice from experienced professionals, who will also guide you through this Complex process please contact us.

What is Leasehold Enfranchisement?

Leasehold enfranchisement is the process you go through to either extend your lease, or purchase a share of the freehold (collective enfranchisement). When you buy a leasehold property, you enter a legal agreement with the landlord known as a lease.

Leasehold Enfranchisement is the statutory process by which qualifying tenants on long leases have the right to renew the term of their lease or acquire the freehold of their building.

When a leaseholder either extends their lease or purchases the freehold to their property, they receive an “enhanced interest” in the property. Therefore, they must pay a premium to the landlord to be able to benefit from this interest.

As the law currently stands, there are three elements to calculating the premium for leasehold enfranchisement:

Reversion – to compensate the landlord for the fact that they will not be able to take back possession of the property for another 90 years (in extension) or ever (in enfranchisement).

Term – To compensate the landlord for the lost ground rent to which they would have been entitled if the lease ran for the full term at the current rates payable.

Marriage Value or Hope Value – extensions of leases under 80 years will attract Marriage Value or Hope Value. Marriage Value is based on the assumption that the freehold interest and leasehold interest in a property are worth more together than their respective parts. The difference between the value in single ownership and the value in separate ownership is the Marriage Value. Hope Value is a deferred form of Marriage Value. It is based on the “hope” that if the freeholder sold the freehold in the future, the third party might realise the Marriage Value, and is a lower monetary value than Marriage Value.

What is a collective enfranchisement?

Collective enfranchisement is the process by which the leaseholders in a building join together and buy the freehold. This right to do so comes under the Leasehold Reform Housing & Urban Development Act 1993.

Reforming valuation in leasehold enfranchisement published by Law Commission

The Law Commission of England and Wales has [09 January 2020] published a report setting out options to reduce the cost that leaseholders have to pay to buy the freehold or extend the lease of their homes (known as “enfranchisement”). The reforms have the potential to make the process easier and more affordable for millions of leaseholders across England and Wales.

The Law Commission’s report puts forward a range of options to make it cheaper for leaseholders to buy their freehold or extend their lease. As well as reducing the price, these options can clarify and simplify the law, making the process of leasehold enfranchisement easier and less expensive to operate.

The Government asked the Law Commission to review the law of leasehold Enfranchisement in order to promote transparency and fairness in the residential leasehold sector and provide a better deal for leaseholders. On valuation, the Law Commission was asked to provide options to reduce the premium (price) payable for existing and future leaseholders to enfranchise their homes, whilst ensuring sufficient compensation is paid to landlords to reflect their legitimate property interests. The report examines the method by which the value of the landlord’s interest is calculated, to identify reforms that could lower premiums without breaching the UK’s human rights legislation that protects the landlord’s property interests.

The options for reform

The report puts forward three key schemes for determining the premium, each of which will make enfranchisement cheaper, saving leaseholders money. Each scheme uses a different method to determine the price of enfranchisement and allow further reforms to make the process simpler and to reduce uncertainty. 

The report also explains the role that simple formulae – such as a multiple of ground rent – could play in delivering reforms, while explaining that their wider use is not possible under the UK’s human rights laws.

Alongside the three schemes, the Law Commission has put forward a range of other options for reform. These include:

Prescribing the rates used in calculating the price, to remove a key source of disputes, and make the process simpler, more certain and predictable.

Helping leaseholders with onerous ground rents, by capping the level of ground rent used to calculate the premium.

The creation of an online calculator for determining the premium to make it easier to find out the cost of enfranchisement, and reduce uncertainty around the process.

Enabling leaseholders who are collectively enfranchising a block of flats to avoid paying “development value” to the landlord unless and until they actually undertake further development.

Professor Nicholas Hopkins, Property Law Commissioner said:

We were asked to provide options for reform that save leaseholders money when buying their freehold or extending their lease, while ensuring that sufficient compensation is paid to landlords. This is what we’ve done.

We are ready to help the Government in implementing whichever options for reform they choose.

Housing Secretary Rt Hon Robert Jenrick MP said:

I welcome these proposals from the Law Commission which provide options to make it simpler and faster for leaseholders to buy their freehold or extend their lease.

I will consider the proposals outlined in this report carefully and set out our preferred way forward in due course.

“We have already committed to addressing the abuses of leasehold seen in recent years, by reducing ground rents to a peppercorn level and limiting new leasehold to apartments, save in the most exceptional circumstances. The Competition and Markets Authority is examining the alleged misselling of leasehold properties and I will also await their findings with interest.”

Next steps

We consulted widely in putting together the options for reform. Leaseholders have advocated sweeping reform to lower the cost of enfranchisement of their homes. We have heard contrary arguments from landlords and investors – including charities and pension providers – the value of whose interests would fall if premiums are reduced.

The Law Commission doesn’t hold views on which scheme and which other options for reform should be adopted, as this is ultimately a decision for the Government.

The Law Commission will be making further recommendations in the coming months for reforms to improve the current complex enfranchisement system.

We will also be publishing reports on reforms to make common hold a viable alternative to leasehold, and on improvements to the law that gives leaseholders the right to manage their properties.

One common question we get asked is what is my lease extension cost? how can I know that value? For that we added a tool to our website that allows you to get an idea as to the cost of your lease extension. To use our lease extension calculator simply fill out the required information and our easy to use calculator will produce an estimate and give an estimated value for your property.

We have recently added a tool to our website that allows you to get an idea as to the cost of your lease extension. So it made sense for this information to be available to the public to use.

And another question we get asked is ‘how accurate is your estimate?’

The answer to this is that the calculator is reasonably accurate, in so far that it is useful to obtain an initial estimate but it is still only a ball park figure. In order to gain an accurate figure we will need to undertake a details valuation.

The calculation is only an estimate and doesn’t qualify as professional advice. The calculation doesn’t take into account future changing ground rents, specific details related to the property, specific issues relating to a location nor if there’s an intermediate lease involved.

In addition to our free calculator ​Leasehold Valuations offers a range of leasehold and freehold valuation services and solutions to both Landlords and Leaseholders, depending on your requirements and objectives.

How much will it cost you to extend your lease? Get an estimate using our lease extension calculator.

The first step within the lease extension process ​is to have a valuation carried out to assess the likely premium payable. even if you choose to proceed with a voluntary lease extension we might advise you to still take valuation advice to make sure the premium your freeholder is voluntarily offering is a “good deal”.