A complete guide to choose an expert to evaluate the value of your leasehold extension

Leasehold extension is a bit of a lengthy and complicated process that includes cost estimation and getting the right expert  to take care of every single step engaged in the lease extension process, while avoiding every possible pitfall. Therefore, if you’re also considering extending the lease, then probably the first question that comes in your mind is ‘How much it will cost?’Unfortunately, it is not at all possible to estimate the exact cost to be incurred in extending the lease at the beginning of the process. Hence, let’s discuss this in brief:

Who can apply for a lease extension?

To apply for lease extensions, homeowners must:

  • Own a lease, which was originally granted for  at least of 21 years in length ; and
  • Have owned the property for a minimum of 2 years;

There are a few exceptions such as commercial or business leases as well as the properties which are a part of a charitable housing trust.

How to calculate the value of leasehold extension?

The cost of a leasehold extension depends on  multiple factors such as the value of the property, the annual ground rent, the number of years left on the lease and the ground rents payable during the term of the lease Therefore, it is necessary for you to contact an expert to calculate the value of the residential lease extension.

How to choose an expert and why you should consult one for leasehold extension?

The legal procedure around the leasehold extension is complicated and thus, requires an adequate understanding of the laws and regulations surrounding leasehold enfranchisement to manage the  process successfully. As this area of law is a minefield, you will require an expert who can assist you at every single step along the way  

The residential leasehold extension surveyor will help you produce a valuation report, which will calculate the premium payable for a lease extension. Every leasehold extension has numerous debatable variables and only an expert with the experience in leasehold law can be able to handle such debates and negotiate on your behalf. Now the question arises, how to choose an expert who could help you calculate the value of the leasehold extension? The answer to this question is:

  • You should choose an expert who has sufficient knowledge of leasehold law and other related  rules and regulations
  • Check whether the specialist you are going to hire is competent to estimate the local property values or not
  • Check the expert’s previous experience including  the following:
    • Is the expert a member of the Royal Institution of Chartered Surveyors (RICS)?
    • Does the expert have a clear fee structure or not? (does he charge on hourly basis or project basis)
    • Does the expert have enough knowledge about the geographical location of the property?
    • Does the expert have an online presence and has an active website?
    • Does the expert clearly and effectively communicate with you?
    • Is the expert ready to provide evidence before a Tribunal?
    • How many times the expert has appeared at a Tribunal?
    • Does the expert mainly act for freeholders or leaseholders?

The role of chartered surveyor for the lease extension

The above mentioned points already describe the significance of professional advice and consultation in the lease extension process. Let’s throw light on the role of chartered surveyor for lease extension:

An expert should be able to:

  • Evaluate the value of the leasehold extension in line with schedule 13
  • Help you know how much to offer landlord in the tenant’s notice
  • Help you know how to respond to the landlord’s counter notice
  • Negotiate on your behalf with the landlord

Therefore, it would be strongly advisable  for you to appoint an expert to extend your lease because a valuation surveyor should  have good knowledge of the leasehold law and local property market. Moreover, we have come up with a chronology of steps to execute to make the leasehold extension process easy and effective:

Step 1: Appoint a chartered surveyor for lease extension who is a member of the RICS

Step 2: Ask your solicitor to serve a formal notice on your landlord based upon the valuation received by your surveyor  

Step 3: Once the counter notice is received from your landlord ask your surveyor to negotiate the premium payable.

Step 4: Once the premium has been agreed, ask your solicitor to complete the new lease.

At Leasehold valuations, our specialists handle a large number of lease extension cases in the UK every year. Hence, we are familiar with such cases and can help you make the most of your hard-earned money while making the lease extension process transparent and hassle-free.

What is the difference between lease renewal and lease extension?

Most people, who are at the end of their lease term, encounter two words that seem to mean the same – extension or renewal? Many people, including judges and some professionals, confound this term as a lease extension with a lease renewal. Almost all leaseholders have the right to extend the lease term beyond the end of the initial term. In this article, we will describe whether there is a difference in these options

In very basic layman’s language lease renewal is a new lease but with the majority of the terms remaining the same. There may be some changes though, for example, to modify the lease terms. Lease extension is used to mean that you are extending the term of your lease (perhaps by the statutory 90 years or some other length) with the main terms of the lease remaining intact. However, even in lease extension you can alter some terms. So in essence, lease renewal and lease extension are the same thing (as far as leasehold valuations are concerned) but some people use the two phrases interchangeably.

A lease extension still requires a completely new lease to be drawn up although in most cases the only thing that is changing is the end date of the lease.

The parties need to sign a brand-new lease from a legal perspective in order to renew a lease. A lease extension extends the term, which usually includes the terms of the existing lease.

If you’re left with around 83 years on the lease-end period we would certainly suggest that you look for more professional and legal advice. As with an expert solicitor, you will get help to decide what you should do to renew or extend your lease.

Leasehold valuation tribunal – Things you should know about LVT

What is the Leasehold valuation tribunal Or LVT? 

The Leasehold Valuation Tribunal (LVT) has been renamed First-tier Tribunal (Property Chamber) (FTT) and is a statutory court in England that determines different types of landlord and tenant conflicts involving residential property. The FTT usually consists of a panel of three; one with a background in property law (usually a solicitor); one with a background in property valuation, generally a qualified surveyor; and a layman, although some decisions of the FTT are decided by a single member. The FTTs are indeed non-departmental public organizations. 

What is covered by the FTT’s jurisdiction? 

The FTT has wide-ranging jurisdiction over all aspects of a residential property including service charge determination, variation to long leases, the premium payable for a lease extension or freehold purchase and appointments of managers for buildings that are not managed properly. The FTT has the power to provide landlords with dispensations from compliance with the law. A few examples are: 

  • Deciding the price be paid by leaseholders compulsorily acquiring either the freehold of houses or lease extensions of property or collectively exercising the right to buy the freehold of a collection of flats.
  • Evaluating how much service charge is payable.
  • Granting landlords exemptions from compliance with statutory consultation on service charges. 
  • Assessing the appropriate level of fees charged by landlord’s for lease extensions
  • The appointment of managers and receivers for flats improperly managed

How does the FTT differ from the County Court process? 

The FTT is a more informal and less adversarial arena. The FTT provides a more open platform to discuss the dispute among the parties and has limited authority to grant costs. 

How to apply to a First-tier Tribunal (Property Chamber)? 

You can collect a form from your local First-tier Tribunal (Property Chamber) office or the leasehold advisory services website. Before submitting a request, make sure you have taken all the previous steps and are ready to submit the final application. For example, if you want to appoint a manager for the property or building, you usually have to give the freeholder a certain notice before submitting the application. Other sources of assistance are the Leasehold Consultancy Service, a solicitor, a citizen’s advice office or other advice centres in your area can help you with the procedure and guide you through the application. 

How do First-tier Tribunal (Property Chamber) work? 

First-tier Tribunals are formed by a panel composed of three members: a solicitor, a valuer and a non-expert. It is independent and unbiased. It is a kind of judicial hearing, but less formal than a court. It is important to get professional help and their perspective before you proceed as the proceedings can get quite complicated and the formalities that need to be adhered to are quite confusing at times. 

The leaseholder or the freeholder can take their problems to the First-tier Tribunal. The First-tier Tribunal offices are not the only place to hold hearings. They can be held near your address and are often open to the public in offices of the local council. You should go to a hearing in the first place, before planning to apply to a First-tier Tribunal to resolve a dispute. Your regional First-tier Tribunal office can tell you when and where the next hearing regarding your issue will take place. 

How long does the FTT process take? 

This depends on the amount of supporting documents, the nature of the final application and the availability of the Tribunal. As an example, it usually takes four to six months from start to finish for a simple application for a determination of the reasonableness of service charge. 

What happens at a First-tier Tribunal hearing? 

You need to gather the evidence before the hearing. Based on the information provided by you and the Freeholder, the First-tier Tribunal will take all submissions into account and make a decision. Both parties will have the opportunity to present their side of the story. The First-tier Tribunal mostly asks questions, and you will have the opportunity to ask your side of questions to the freeholder and any witnesses. You may need to wait a few weeks after the hearing before a written decision comes through the post.  Many First-tier Tribunals have waiting lists. 

What if you don’t agree with the Leasehold Valuation Tribunal’s decision? 

You may appeal when you think that the decision of the First-tier Tribunal is incorrect. This is normally only possible when the First-tier Tribunal has acted inappropriately or has not followed the correct procedure. You cannot apply simply because you don’t accept the decision. 

How much does a Leasehold Valuation Tribunal cost? 

Application cost ranges from £ 300 to £ 500. If you win, the First-tier Tribunal may be decide to award all costs to one side but this is rare. If more than one leaseholder is affected by the problem, you can apply and share the costs.

Why Leases Are For a Set Number of Years?

Freehold Property” and “Leasehold Property” are the two common terms of real estate that you must have encountered while buying any property. The basic meaning of this term, or how the former refers to this Freehold term, is properties that are “free of hold” by any third party or entity. Leasehold properties are leased for a certain period, e.g 99, 125 or even 999 years from the time of construction. 

But, why is there an unusual number of years? Why 99 years? Or, What happens to the property at the end of the lease? Who receives ownership after the lease is over? Or what are renewal conditions applicable in all these situations?  

Someone who buys a leasehold residential or commercial property will own the property only for a set period of years, after which the property is returned to the landowner. The buyer of the leasehold property is expected to pay fixed ground rents to the landowner. Under certain circumstances the lease can be extended after the lease period is over.   

What happens upon the expiry of the lease? 

The property is returned to the freeholder or the next entity up the chain of ownership (e.g headlessee). 

The XX-year lease concept 

The lease begins with the date the property is handed over to the leasehold purchaser. The lease is based on an agreement contained within a document.  The developer is then allowed to build and sell residential or business premises. These properties will be owned by the buyers only for XX years (e.g 99, 125, 999) and after the end of lease duration the landowner can claim back ownership. In addition, the landowners get ground rent in accordance with the lease agreement every year for the duration of the lease. 

The lease contract contains both the lessor’s and lessee’s rights and obligations in respect of property occupancy, in exchange for a specified rental charge. The terms and conditions are all contained in the Agreement, such as the nature of rights, leasing periods, leasing rights, conditional clauses, the termination clause, etc., All these are essential for sustaining any lease and dealing with any dispute concerning the lease in future. 

The purpose of setting a fixed term time is to control both the use and the transfer of land. This period was viewed in earlier days as a safe interval, as it covers the leaseholder’s lifespan. It was also considered as a reasonable length of time to protect the owner’s ownership. 

Some facts about leasehold property 

  • The length of a lease can be extended by paying a premium to the freeholder.
  • Developers tend to favour developing flats on a leasehold land because the expense of these plots is cheaper than freehold properties.
  • Banks do not like to finance the purchase of a leasehold property, particularly if the remaining lease period is under 70 years. As the lease approaches the end of the lease period the value of such properties also falls. 

Buying an old leasehold property 

Leasehold properties are always more affordable than freehold property and may be purchased as an investment. 

The shorter the remaining time of the lease the cheaper the property is to purchase compared to similar properties with longer lease lengths remaining. However, a payment (premium) must be paid to the freeholder in order to extend the lease and this amount varies widely depending upon location, type of property, how many years remaining and ground rents payable. 

For properties with less than 70 years remaining it is very difficult to get mortgages from banks and so it is usually necessary to extend the lease before you can get a mortgage. 

If you are selling a short lease property you will most likely only be able to attract cash buyers for this reason and so you will be forced to sell it for less.

Why there are two types of ownership in the UK – leasehold and freehold?

You are likely to encounter the terms ‘leasehold’ and ‘freehold‘ when you buy property in the UK. These are the two main types of ownership of property which are followed in the UK. This terminology can be the difference between a home worth buying and one that isn’t.  

This very confusing and legal technical term basically means how you own the property. If you own the property and land it stands on free from any involvement of the third party then you are Freeholder of that property or house. And if you have any kind of agreement with the owner of the property to use that house for a certain period of time with terms and conditions and ground rental charge then you are the Leaseholder of that property and you have rented that property from the Freeholder. 

When you are in search of any property, you really want to know what type of ownership you are buying but many estate agents tend to gloss over this ownership fact and sometimes refrain from telling the buyer what type of building they are selling until much later in the process. And even across the internet, there is no clear information about what ownership type the property falls under.  

Leasehold instead of freehold in the UK 

It would be unfair to say that all or most of the property, house, buildings, or flats are held on leasehold instead of freehold. Across all over the UK, there are different systems for managing the property and it can vary from area to area and also depends on what type of property it is. If you find a stand-alone house in the UK to buy you are most likely to find it under Freehold.  The majority of houses in the UK are freehold although there are still many on leasehold. Almost all flats in the UK are held on leasehold ownership (although a block of leaseholders may collectively own the freehold of their block). 

Flats are usually leasehold because there must be some way to own the ‘shared’ land underneath the flats, but it is common for flat owners to own a freehold share when buying the flat. If you are buying a flat that’s what you want! You would like to become a shareholder in a ‘holding’ company owning the underlying land and organizing maintenance when you buy the flat.

Why Leasehold? 

The reason why most land is held on the leasehold is from history. For centuries the Crown, Church or Duke of Westminster or other major landowners owned the underlying land. Instead of selling the land outright, they sold long leases to people who wanted to build: building owners had a lease on the land they could sell along with the property, and there was usually a ‘ground rent’ going back to the leaseholder. 

Keeping the history aside, the reason for these strange arrangements (and we’re talking about England here) is that the history of land ownership has indeed been uninterrupted for a very long time. It actually goes back to the Norman Conquest and the sharing of various Lords from Baronial lands. Since then, legal precedent and land ownership have evolved in confusing, unusual ways. 

Some leases are long and often run for 200 to 999 years, causing relatively little issue. Ground rents are often very small, sometimes because of centuries-old contracts that did not even permit for inflationary increases! But on the other hand, if a lease is running for a long time or the ground rent is high, it can make a property fall in value and be difficult to sell. 

As time passes, the Freeholder of land increases the ground rents and many charges on new lease agreements. As a result, since WWII successive governments have given leaseholders more rights over free-holders (people that own the foundational land).  Even rights like owning the leasehold property from freehold. 

For example, if 50% of qualifying leaseholders in a qualifying block of flats  agree, then they can force the freeholder to sell them the freehold so it can be held in common by the owners of the flats. They have the legal right to purchase it. However, they obviously have to compensate the freeholder for taking his property. 

Why does the Leasehold system still exist? 

The leasehold system exists because there are situations where it would not be possible for everybody to own the freehold of their property. For example, every flat owner in a block could not own the freehold of their particular flat as isolation to the other fellow leaseholders. A flat owner on the second floor of a block of flats cannot own the land under his flat – that would be somebody else’s flat. In addition flats have common areas be it just a staircase or also a car park and gardens. How would these areas be maintained? 

Therefore, a leasehold system is crucial in maintaining a healthy property market. 

It has become common for developers in the last 10-20 years to try to retain an interest in a house by selling it on leasehold. By increasing the “ground rent” in line with traditional inflation, they try to cash in on rising property prices, every 5 or 10 years. This is a scam.

Step by step guide to buying a freehold

Buying a property or buying your own house cafreen be an overwhelming or exciting feeling, but buying a dream house can be an intensely stressful experience as well.  If you’ve bought a flat the chances are you’ve been sold a leasehold property. 

The UK leasehold-freehold structure is now entrenched in our housing market. Traditionally all stand-alone buildings are freehold, while most apartments and flats are leasehold. There is a very minor streamline difference between these two and buying the exact property that you were looking for can be hard. Yet, many property owners do not take time to learn the comprehensive knowledge of this perplexing system. And with all this confusion you may wonder if you can buy your property’s freehold and how you can go about buying the freehold. 

Should you buy the freehold property? 

The basic question arising before any purchase is that should you buy the freehold of your property? Most people or apartment owners are always happy to purchase property on leasehold terms. However, in certain situations, you may decide that you want your own property. Reasons could be anything from the fact that you want more control over your block and, in a particular case, where you are spending money. Or you are just tired of your freeholder’s unfair ground rent rises in the contract and have to pay excessive rates for the building services. In this stated situation, it is not unusual for leaseholders to try to purchase the property’s freehold so they can leave stress behind. 

 Here are a few reasons for buying your freehold. 

Reduce long-term costs – The freeholders of the property have control over service charge rates and the total cost of management. You will also find that your flat’s insurance can be decreased. 

No restrictions – Often, leasehold contracts come with a whole series of terms and conditions to be adhered to by the leaseholder, from allowing pets and many more but  once you will have freehold property all the restrictions can be lifted. 

Increasing the flat ‘s value – When your lease period drops below 80 years, it can be more costly to extend the lease and purchase the freehold. However buying the Freehold is worth doing, to maintain or increase your flat ‘s value. 

What type of property should you look for? 

If you go for a flat it will be sold either as a leasehold or share of the freehold. There is no practical reason for houses to be sold on a lease basis. Our advice would be to purchase the freehold as soon as you are eligible. 

Buying the freehold of your block of flats will require the involvement of most of the other leaseholders in the block. You will not be able to purchase the freehold of the whole block by yourself. You’ll still have to contribute towards service charges of the building but you’ll be able to have more control over how much the charges are. It is worth noting that if you have a flat and you own a freehold share, you still have a lease. Nevertheless, you should be able to extend it for free without any cost and it will be from a new entity owning the freehold. 

Purchasing the freehold can be very difficult, therefore many people simply extend the lease and carry on with their freeholders. To help you through the process, we’ve pulled together questions and legal guidance articles that will guide you through the key points of purchasing your property and help you to make the right decisions. Here is a step by step guide to buy Freehold property. 

Buying the freehold of Flats or apartments 

Buying a flat and apartment includes several steps and you may need help from others in terms of support and legal advice. 

Check you’re eligible 

There are a number of requirements that you will need to meet in order to be able to purchase your freehold. The most simple rule or requirement is that for more than two years you must have been an owner of a leasehold apartment. Then the other sets of criteria can vary from place to place. 

Speak to your neighbours 

Your next step should always include some of your fellow residents and convincing them to buy along with you. As to purchasing the freehold, at least two thirds of the leaseholders must be “qualifying leaseholders”. At least half of the building’s leaseholders need to participate in the purchase. Convincing them can be relatively easy to do if you and other building residents are all currently paying extortionate ground rents or your freeholder always seems to be choosing the most expensive choice when it comes to building services. 

Find out the cost of the freehold 

You need to figure out how much this is going to cost you. It’s hard to give an estimate as the price of the freeholds varies as much as the price of the house. You’ll need to get detailed market valuation from a surveyor. The one thing you should always keep in mind is that the shorter your lease or short duration lease, the more expensive the freehold will be. 

Get a solicitor 

It is important to take expert advice before buying any property. Not every solicitor will have expertise in Freehold purchases so it is important to find one that specializes in this area. Take advice from a chartered surveyor who specialises in leasehold enfranchisement who can give you a clear understanding of the size, the distribution among the residences, the problems and whether or not the building is suitable. 

Sign a participation agreement 

Next you should draw up an agreement on the participation of every apartment involved. The last thing you want is for someone to drop out at the last moment, raising the cost for everyone else or even falling below the amount of 50 percent who are ready for the purchase. An agreement for participation is basically a contract for all leaseholders involved in the acquisition and outlines all matters among participants – including items such as the conditions for lease extensions once the freehold is acquired. 

Set up a limited company 

The collective purchase of a freehold includes additional responsibility including establishing a limited company. It includes the filing of accounts, the selection of a nominee buyer, a group communications manager and elected supervisors. If you want to become a director, consider taking out directors’ insurance to protect yourself from liabilities.   Your lawyer will help you with everything above. 

Seal the deal 

The solicitor or Valuer can sometimes informally approach your freeholder with an offer if they agree, which can also immediately reduce your legal costs. If that doesn’t work, you’ll have to officially issue a notice that every leaseholder must sign – this is binding. 

The freeholder then has to serve a counter notice within two months. Negotiations then take place between your surveyor and the freeholder’s surveyor, to try to reach an amicable agreement as to price. If agreement cannot be reached on a suggested price then you can take your case to the First-Tier Tribunal, which is the arbiter of such disputes and will decide the price which both leaseholder and freeholder have to agree to. 

Buying the freehold of your house 

In general, buying a freehold house is more simple than buying for a flat because you can act alone and you don’t have to convince someone else. You will need to hire a qualified leasehold solicitor and obtain a professional valuation to make a bid via the solicitor to the Freeholder of that property. 

If you can’t agree on a figure or the discussions hit a dead-end then you can take it to the First-Tier Tribunal just as with the agreements of flats freehold. The First Tier Tribunal will decide the final price.

Leasehold vs Freehold – What’s the difference?

You are more likely to encounter the terms ‘leasehold’ and ‘freehold’ when you buy your first house or any property. These are the two main types of ownership and before buying a house, you should understand the difference! Here we will look at every way you can legally own your home along with its advantages and disadvantages of freehold buying or taking it on lease.  We’ll guide you through some of the more technical elements and try to explain which will suit you best according to your needs. 

In the UK, this is two separate forms of homeownership that exist – freehold and leasehold. Each of these is vastly different from each other and it’s important to know what needs to be applied to a property that you’re thinking of buying or renting. Because if you make a misinformed decision, it can result in problems in the future. 

What are the different forms of property ownership? 

The two types of legal ownership are fundamentally different: freehold and leasehold. While estate agents tend to gloss over this ownership fact and mostly ignore telling the buyer what type of building they sell. This terminology is the difference between a home worth buying and one that isn’t worth buying. Many people who don’t find out or understand this while buying a home end up regretting it – getting it wrong can be mostly hugely expensive. 

This very confusing and legal technical term basically means –  

Freehold: Someone who owns the freehold of the property owns the property and the land on which it stands. 

Leasehold: On the other hand, a leaseholder, do not own the property or land on which the property is built. A leaseholder basically rents property from a freeholder for an assigned number of years, decades, or centuries. 

What is freehold? 

If you own a property freehold, it means that you own the property itself, plus the land on which it stands, forever. You are named as the freeholder in the land registry, owning the ‘ title absolute.’ This ensures that you will be responsible for repairing and maintaining your home – with no third party having any say in what you are doing. Traditionally, most houses used to be sold as freeholds. Given the choice, freehold is pretty much always the best option to go for while buying any property. 

The majority of houses are normally sold freehold. However, there are still a large number of houses that are sold as leaseholds. This issue has recently been well publicised and highlighted in the press and is particularly pronounced with new apartments or new houses, so check before you purchase. 

Benefits of having a freehold 

  • You don’t have to worry about the lease running out, as you own the property.
  • You won’t have to pay annual rents, ground rent, services charges or any other landlord charges.
  • No third party has a say on any work undertaken in your property.

Disadvantages of having a freehold 

  • You are responsible for maintaining everything.

What is Leasehold? 

If you own a leasehold property, you do not own the land on which the property is constructed, or the building itself. Instead, you have a lease from the freeholder who owns that property for a period of months or years, just to use the property. Leases generally start with either a 99 but can go up to 999 years. 

With a leasehold, you own the property for the duration of the lease agreement with the freeholder (specific to the terms and conditions of the leasehold). When the lease ends, the property returns to the freeholder, unless you are able to extend the lease. Most flats are owned by leasehold, so while you own your property in the building, you have no stake in the building in which it is located. 

Homebuyers normally buy a ‘lease’ type of agreement from the freeholder for a house or land. The lease can be of any length, it is common for 90 or 120 years but it can be as long as 999 years and short as 40 years. 

In general, the shorter the lease remaining, the less valuable a property is. This means that the remortgage or sale of your property can be difficult once your lease end date is less than 70 years. Almost all the flats in the UK are leasehold, but houses can also be leasehold. A leaseholder has a contract with the freehold owner that sets out both sides’ legal rights and responsibilities.  

Disadvantage of Leasehold 

  • Leaseholders are liable to pay maintenance fees, annual service charge and building insurance costs.
  • Leaseholders have to pay an annual “ground rent” to the freeholder the amount which is decided in agreement.
  • Leaseholders will always have to seek permission for any major works done to or in the property.
  • The freeholder can keep restrictions, such as not owning pets or subletting on leaseholders and they have to follow that.
  • If the leaseholder does not comply with the requirements of the lease, for example in the case by not paying the fees, the lease could be forfeited.

Advantage of leasehold 

  • By signing a leasehold agreement, the tenant negates the need to buy the land. By eliminating the costs of land acquisition, you can drastically reduce its overall and upfront cost.
  • Normally, the freeholder would be responsible for maintaining the building’s common parts, such as the entrance hall and staircase, as well as the exterior walls and roof. Which helps to reduce the stress of maintaining a building to the leaseholder.

For which should you go for? 

In most cases, the Freehold appears to be the safest and preferred option when it comes to buying your own home.  However, this can be expensive. You must do your research before purchasing any property and always check the documents. Depending upon your budget, it may be worthwhile going for a leasehold property as this will work out cheaper and you could also buy in a better location for less than a freehold. 

No matter whether you choose Freehold or Leasehold property, we will always suggest you take proper professional advice so you won’t end up stuck in a bad property situation.

How is the premium calculated?

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:

Date of Valuation:25/03/2010Capitalisation rate:8.00%
Lease Expiry date:24/03/2091Deferment Rate:5.00%
Diminution in Landlord’s Interest
Existing Value
Term
Rent£50
YP 81 years @8.00%12.4755%
£624
Reversion
Vacant Possession Value£505,050
Deferred 81 Years5.00%0.0192
£9,706.75
£10,331
Minus
New lease value
Term
Rent£0New lease at Peppercorn rent
YP 171 years @8.00%0.0000%
£0
Reversion
Vacant Possession Value£505,050
Deferred 171 Years5.00%0.0002
£120.24
£120
Diminution of Landlord’s Interest£10,210
Plus
Marriage ValueNil as lease length greater than 80 years remaining£0
Total Premium payable£10,210

 

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.

What are the various figures that form part of the premium calculation?

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.

Why does the leaseholder have to pay a premium to the landlord?

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

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