Flat Extend Lease

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Ashley Connell

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.

Lease Extension Valuation

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 - these are disregarded. For example, if the property has the benefit of a new kitchen and bathroom, far beyond the average flat in the area, this is disregarded to prevent the increase in value increasing the premium payable for the extension. The same applies if the property is in a very poor state of repair - the landlord shall not be compromised by this lack of maintanence.

    Notwithstanding the above, if the building as a whole is in a poor condition, or the property is adjactent to a building / park / shop that is undesirable, these factors will be taken into account by the lease extension valuer. Example influencing factors are:

    • A flat being siuated above a takeaway with food odour impacting the premises
    • The freehold building being in disrepair and run down
    • Very high service charges or major works invoices
    • Lease Extension Valuer

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

      Say you have 85 years left on your £400,000 London apartment. In 85 years from now, the freeholder will acquire the apartment, the leaseholder at that time will have to vacate and will own nothing. Part of the premium for a lease extension takes the value of the property and assumes the freeholder will take possesion in 85 years from today. If the lease is extended by an additional 90 years, the freeholder is entitled to compensation, as essentially it will take them 90 years longer to acquire the £400,000 (in today's money) when the lease ends.

      The calculations also take into account that the freeholder is paid early, ina lump sum and therefore can obtain interest from a bank or other investment on that lump sum, resulting in a lower premium payable by the leaseholder.

      Ground rent is also cancelled in statutory lease extensions. By the same principle, the landlord is entitled for compensation for the loss of ground rent over the term of the remaining years on the lease - but again it is assumed the landlord can gain interest on the lump sum paid by the leaseholder on completion of the lease extension, reducing the compensation.

      It is not a simple case of multiplying the groud rent by the number of years remaining on the lease.

      Choosing a Lease Extension Valuer

      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.