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Edited by Ashley Connell

Leasehold Enfranchisement Solicitor at Hetts

Lease Extension Valuation - A Full Guide

A lease extension valuation is a crucial part of the process of extending the lease. This kind of valuation differs from a standard property valuation, as it involves complex calculations to value the premium that a leaseholder should pay to a freeholder for the lease extension.

Factors influencing the lease extension valuation

• How many years remain on the lease - see when to extend
• The current ground rent
• Future ground rent
• Time until the next ground rent review
• The value of the property with an assumed long lease
• The capitalisation interest rate applied to the ground rent compensation
• The deferment interest rate applied to the loss of freehold reversion

The condition of the property is irrelevant

It is important to note that improvements and dilapidations do not impact the lease extension valuation, as these factors are disregarded. For instance, if the property benefits from a new kitchen and bathroom of a significantly higher standard than typical flats in the area, this is excluded from consideration to prevent an increased premium payable for the extension. Similarly, if the property is in a poor state of repair, the landlord will not be disadvantaged by this lack of maintenance.

However, factors relating to the condition of the building as a whole or the surrounding environment may be considered by the lease extension valuer. Examples of influencing factors include:

• A flat situated above a takeaway, where food odours affect the premises.
• The freehold building being in disrepair or visibly run down.
• Excessive service charges or major works invoices that could deter potential buyers.


Why do I have to pay for a lease extension anyway?

In simple terms, a UK leaseholder must pay a premium to the freeholder for a lease extension because the freeholder is giving up certain rights and future financial benefits associated with the property. The reasons include:

• Ground Rent Payments: Many leases require the leaseholder to pay an annual ground rent to the freeholder. When a lease is extended, this ground rent is often reduced to zero ("peppercorn rent"). The freeholder loses this steady income and is therefore compensated for it.
• Property Value Increases with a Longer Lease: A property with a short lease is worth less on the market due to buyers’ reluctance to purchase a property with limited ownership. Extending the lease increases the property's value, and the freeholder is entitled to a share of this increase, known as the marriage value (applicable when the lease has less than 80 years remaining).
• Future Ownership of the Property: The freeholder retains ownership of the land and, upon the lease’s expiry, would regain full ownership of the flat. Extending the lease delays this, so the freeholder is compensated for the loss of this future right, referred to as the reversion value.
• Legal Entitlement: UK law, under the Leasehold Reform, Housing and Urban Development Act 1993, allows leaseholders to extend their leases while ensuring that freeholders are not unfairly disadvantaged. The premium ensures fairness to both parties.

In essence, the premium reflects the financial loss incurred by the freeholder as a result of the lease extension. This calculation is complex and considers factors such as the current lease length, ground rent, property value, and interest rates.

Choosing a Lease Extension Valuer

The best possible option for a leaseholder or freeholder is to engage a specialist firm that combines expertise in both valuation and legal advisory services within one team. A firm with extensive experience in the niche area of lease extensions will possess a comprehensive understanding of the intricate valuation calculations and the associated legal considerations.

The editor of this website, Ashley Connell, is one such specialist, offering expert guidance and practical solutions in this complex field.

Don't rely on the landlord's valuation. This will be heavily weighted in favour of the landlord's best interests. We strongly recommend that you obtain your own valuation and use this as ammunition to reduce the landlord's offer. Your chosen valuer should be able to negotiate on your behalf, but only if you proceed through the statutory route.

A lease extension valuation must be prepared by a professional with experience in lease extensions. A valuation is not a standard market valuation of the sellable value of the property, but rather a breakdown of complex calculations to determine how much compensation is due to the landlord in return for extending your lease.

A desktop valuation - cheapest option

In most cases a Desktop Valuation will be suitable, particularly where there are more than 80 years remaining on the lease, or if the flat is very easy to value. A desktop valuation is considerably cheaper than a physical inspection valuation.

A physical valuation - expensive option

Where the property is very unique and it is difficult to find similar properties in the local area that have recently sold, a physical valuation from a local RICS surveyor is recommended. These valuations normally cost in the region of £700 + VAT upwards. If you need a physical lease extension valuation, with attendance by a RICS valuer, we recommend using ALEP's Find a Practitioner webpage and searching by your Post Code.