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