17.2 Development Value and Additional Rights

In the context of lease extensions

Edited by Ashley Connell

Leasehold Enfranchisement Solicitor at Hetts

Assessing Development Value in Lease Extension Valuations

Development value (sometimes referred to as "hope value" or "development hope value") represents the potential financial benefit the landlord might lose due to the lease extension deferring their ability to realise redevelopment opportunities. It is not a standalone component but is assessed as part of the compensation under Paragraph 5 of Schedule 13 of the Leasehold Reform, Housing and Urban Development Act 1993, which states:

"Where the landlord will suffer any loss or damage to which this paragraph applies, there shall be payable to him such amount as is reasonable to compensate him for that loss or damage.
(2) This paragraph applies to
(a) any diminution in value of any interest of the landlord in any property other than the tenant’s flat which results from the grant to the tenant of the new lease; and
(b) any other loss or damage which results therefrom to the extent that it is referable to his ownership of any interest in other property."

In practice, development value arises when the extension impacts the landlord's ability to exploit underutilised spaces (e.g., roof voids, basements, or common areas) for new dwellings, extensions, or other enhancements. For individual lease extensions (unlike collective enfranchisement under Chapter I), there is no statutory right to acquire additional property outside the flat's demise. However, if the extension indirectly affects development potential, such as by deferring reversionary possession by 90 years, it may trigger compensation.

When Development Value Applies

• Roof space or loft conversions: If the landlord could potentially develop the roof into additional living space (e.g., a new flat), the extension defers this opportunity. Compensation is claimable if the development would diminish the value of the landlord's interest in the building or adjacent properties.
• Basement or garden extensions: Similar logic applies if short leases would allow the landlord to regain control for redevelopment sooner.
• Whole-building redevelopment: Rare in individual extensions, but if the flat is part of a block with redevelopment potential (e.g., demolition and rebuild), the extension could reduce the landlord's "hope" of negotiating higher premiums or regaining possession.
• Threshold for inclusion: Claims are uncommon and must be evidenced. The Tribunal will only award compensation if the loss is demonstrable and not already captured in the diminution or marriage value components. For leases over 80 years unexpired, hope value may be lower or nil under Paragraph 4(2A). Additionally, tenant improvements are generally disregarded in valuations, but if they reveal development potential (e.g., a loft conversion increasing freehold vacant possession value), this can influence the assessment of loss.

Development value is more prominent in collective enfranchisement (Schedule 6), where leaseholders may acquire common parts, but it can cross over to extensions if the landlord argues injurious affection to other interests.

How to Calculate Development Value

Valuation is hypothetical and based on the "no-Act world" assumption, focusing on the net present value (NPV) of the deferred opportunity. Steps include:

1. Estimate gross development value (GDV): Project the open market value of the developed space (e.g., a new loft flat valued at £500,000).
2. Deduct costs: Subtract construction costs, professional fees, finance costs, and a developer's profit margin (typically 15-20%) to arrive at the net development value (e.g., £500,000 GDV - £300,000 costs = £200,000 net).
3. Assess landlord's loss: Determine the portion attributable to the landlord (e.g., 50% if akin to marriage value in development contexts, though not statutorily fixed for extensions).
4. Defer and discount: Since the loss is realised only at the end of the original lease term, apply a deferment rate (usually 5% per annum, per Sportelli) to calculate NPV. For example:
   • If the unexpired term is 68 years and net development value is £200,000, the present value factor (PVF) at 5% for 68 years is approximately 0.036.
   • Deferred value = £200,000 × 0.036 = £7,200.
   • If the extension defers this further to 158 years, the additional loss is the difference in deferred values, potentially reducing compensation significantly.
5. Adjust for probabilities: Incorporate "hope" elements by applying a risk discount (e.g., 20-50%) if planning permission or feasibility is uncertain. The calculation often involves highly hypothetical sums, and compensation is not payable immediately but diminished over time to reflect the lease term.

Case law examples:

• Hanson & Anor v Harding & Ors [2025] UKUT 78 (LC): The Upper Tribunal ruled that development value (e.g., from a completed loft conversion increasing FHVP by £60,000) must be deferred to the lease end and discounted at 5% per annum, reducing a £20,000 claim to nil. This overturned a First-tier Tribunal decision that awarded immediate compensation, emphasising that the loss is hypothetical and tied to future realisation, not the valuation date.
• Cutter v Pry Ltd [2014] UKUT 215 (LC): While on enfranchisement, it illustrates acquiring undeveloped spaces, with development value shared based on potential uplift.

Surveyors use tools like the "residual method" for GDV and discounted cash flow for deferment. Total compensation is added to the premium, but Tribunals scrutinise claims to avoid overcompensation. This approach ensures consistency, particularly in high-value areas, but requires expert valuation to navigate Tribunal interpretations.

Assessing Additional Rights in Lease Extension Valuations

"Additional rights" refer to any new or modified rights, covenants, or easements incorporated into the new lease under Section 57, which governs the terms of the grant. The new lease must generally replicate the existing lease's terms (as at the valuation date), but modifications are permitted to address changes or defects. These can enhance the leaseholder's position (e.g., access to new areas) and thus increase the premium.

When Additional Rights Apply

• Modifications for practicality: Per Section 57(1), terms can be altered to account for omitted property, post-grant alterations, or combining multiple leases.
• Service and maintenance covenants: Section 57(2) allows new provisions for payments related to services, repairs, or insurance if the original lease lacks them or fixes inadequate amounts. For instance, if the old lease had no or fixed service charge provisions, the new lease can introduce variable payments, potentially increasing ongoing costs for the tenant.
• Collateral agreements: Section 57(3) continues existing side agreements with adaptations, excluding renewal options or pre-emptions (Section 57(4)). Adjustments may be needed if the new lease starts after the old term, requiring additional payments for cost differences (Section 57(5)).
• Remedying defects or changes: Section 57(6) permits exclusions or modifications if needed to fix defects or reflect post-original-lease changes (e.g., granting access rights to modernised common areas or varying service charge percentages that exceed 100% due to building alterations). The landlord can require reasonable modifications, but these must be justified, such as modernising outdated clauses (e.g., increasing notice fees from nominal amounts to £50-£100 for administrative efficiency).
• No statutory grant of new property: Unlike enfranchisement, extensions do not automatically include additional demise (e.g., loft space), but parties can agree informally, treating it as a voluntary surrender and regrant.

If additional rights are included (e.g., exclusive use of a storage area or easement over roof space), they must be "reasonable" and can trigger valuation adjustments.

How to Calculate the Impact of Additional Rights

Additional rights affect the premium by increasing the value of the leaseholder's interest (potentially inflating marriage value) or requiring compensation under Paragraph 5 if they diminish the landlord's other interests.

1. Value the enhanced interest: Assess the uplift in the flat's market value due to the right (e.g., adding roof access might add £50,000 to FHVP).
2. Incorporate into components:
   • Diminution: If the right reduces the landlord's reversionary value (e.g., by granting perpetual access), include in the before/after comparison.
   • Marriage value: The uplift contributes to the overall increase, with the landlord claiming 50%.
   • Compensation: If the right affects other property (e.g., restricting landlord development), add under Paragraph 5, using similar deferment methods as for development value. Modifications like new service charge provisions can indirectly influence the premium by altering perceived lease value and risks.
3. Formulaic example: If an additional right adds £30,000 to the leaseholder's new interest value:
   • Recalculate marriage value = (New combined values including uplift) - (Old combined values).
   • Landlord's share = 50% of the incremental marriage value attributable to the right.

Case considerations: Tribunals (e.g., in Kintyre Ltd v Romeomarch Property Management Ltd [2006] 1 EGLR 67) evaluate whether rights over spaces like lofts are acquirable, influencing whether valuation includes them. In Rossman v The Crown Estate Commissioners [2015] UKUT 288 (LC), the Upper Tribunal allowed variation of a defective service charge provision under Section 57(6), where fixed percentages exceeded 100% of expenditure, remitting for a fairer scheme based on evidence of defects. Informal agreements for additional rights often negotiate 30-50% of the uplift as premium addition.