15.6 Deferment Rate for Loss of Freehold Reversion

In the context of lease extensions

Edited by Ashley Connell

Leasehold Enfranchisement Solicitor at Hetts

What is the Deferment Rate and Why is it Used?

The deferment rate is essentially a discount rate applied to estimate the current value of a future asset, in this case, the freeholder's right to regain full possession of the property. It accounts for the time value of money, inflation, risk, and potential growth in property values. Without it, the future reversion would be overvalued in today's terms, leading to unfair premiums.

The rate reflects several components: a risk-free rate (often based on government bond yields), a risk premium for the uncertainties of property investment, and a deduction for expected real growth in property values. This ensures the premium compensates the freeholder fairly for the extended wait, typically an additional 90 years, before they can claim the property. The deferment rate is crucial because small changes can significantly impact the premium; a lower rate increases the present value of the reversion, raising the cost for the leaseholder.

The Current Deferment Rate

Following established precedent, the standard deferment rate is 5% for flats and 4.75% for houses across the UK, outside of prime central London where adjustments may apply. These rates have been widely adopted since 2007 and are used unless successfully challenged in tribunal. For flats, the slightly higher rate includes an additional 0.25% to account for management complexities.

However, the Leasehold and Freehold Reform Act 2024, which received Royal Assent in May 2024, empowers the government to prescribe standard deferment rates through secondary legislation, potentially replacing the current ones. As of September 2025, consultations on these rates were expected over the summer, but no final changes have been implemented yet. Speculation suggests rates could drop to around 3.5%, which might increase premiums for longer leases by enhancing the present value of distant reversions, though it could benefit shorter leases by offsetting the removal of marriage value.

Key Case Law: The Sportelli Decision

The modern deferment rates stem from the landmark case of Earl Cadogan v Sportelli [2007] 1 EGLR 153, heard by the Lands Tribunal and upheld by the Court of Appeal and House of Lords. In this case, several leaseholders in Cadogan Estates properties sought to challenge higher deferment rates proposed by the freeholder.

The Tribunal rejected market evidence influenced by "hope value" (speculative gains from non-participating flats) and instead adopted a formula: Deferment Rate = Risk-Free Rate (RFR) + Risk Premium (RP) - Real Growth Rate (RGR). They set RFR at 2.25% (based on index-linked gilt yields), RP at 4.5% for houses (reflecting illiquidity and volatility), and RGR at 2%. This yielded 4.75% for houses. For flats, an extra 0.25% was added for management risks, resulting in 5%.

The decision established these as "generic" rates applicable nationally for leases with over 20 years remaining, barring exceptional circumstances. Subsequent cases, such as R (Wellcome Trust Ltd) v Upper Tribunal [2013] EWHC 2803 (Admin), reinforced that challenges require strong evidence of changed conditions, like shifts in bond yields. Despite falling gilt yields since 2007 (sometimes negative), the rates have held firm, though calls for review persist.

How the Deferment Rate is Applied in Valuations

In a lease extension valuation, the premium comprises:

• The capitalised value of lost ground rent (using a capitalisation rate, often 5-8%).
• The freeholder's reversion loss: the present value of the property at the end of the original lease, minus the (negligible) value at the end of the extended lease.
• Marriage value (50% share of the uplift in property value from the extension, payable only if under 80 years remain; abolished under the 2024 Act for new claims).
• Compensation for other losses.

The reversion is calculated as: Present Value (PV) = Freehold Vacant Possession Value (FHVP) × PV of £1 deferred for n years at the deferment rate.

The PV factor is 1 / (1 + deferment rate)^n.

Worked Example

Consider a flat with a freehold vacant possession value of £200,000, 60 years remaining on the lease, and a negligible ground rent (for simplicity, focusing on reversion). Assume a 5% deferment rate for flats.

1. Calculate the PV of the reversion at the end of the original lease (60 years):
   PV_original = £200,000 / (1.05)^60 ≈ £200,000 × 0.0536 = £10,720.
   (Note: (1.05)^60 ≈ 18.679, so 1/18.679 ≈ 0.0535; precise calculation yields 0.05364.)
2. After extension (150 years total):
   PV_extended = £200,000 / (1.05)^150 ≈ £200,000 × 0.00046 = £92.
   This is often treated as zero due to its minimal value.
3. Freehold reversion loss = PV_original - PV_extended ≈ £10,720 - £92 = £10,628.

If the lease were under 80 years, marriage value would add to the premium, but here we isolate the reversion. In a full valuation, add capitalised ground rent (e.g., £50 annual rent over 60 years at 6% yield: £50 × 15.762 = £788) for a total premium around £11,416, plus fees. Valuations require professional surveyors, as assumptions like FHVP can vary.

Lease Extension Reversion Loss Calculator

Calculate the freeholder's reversion loss for a lease extension based on property value, deferment rate, and years remaining on the lease.

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Reversion Loss: £0