The price that you will pay to your landlord or freeholder to extend your lease depends on a combination of two (or possibly three) things depending on the length of your lease.
The key factors needed to determine the price are the current length of your lease, the ground rent payable now and in the future and the current value of the flat.
To assist you in this process you will need the services of a surveyor or valuer to calculate the overall price to pay for the lease extension and also the figure that you should put in your notice of claim (the section 42 notice).
If you want to know a ball-park figure for what your lease extension might cost, you can use our “FREE Lease Extension Calculator” [LINK]
To get help with valuation “click here” [LINK]
Factors affecting the price you will pay
- Loss of ground rent income
The ground rent under a lease can vary and it is important to consider not just the ground rent you currently pay. Most leases contain provisions for the ground rent to increase over time and some even provide for it to be put to an ‘open market’ review or link it to a percentage of the flat’s value at a particular point in time. The impact on value of this sort of provision can sometimes be hard to assess.
Under the new lease there will be a nil ground rent and the freeholder has to be compensated for the loss of the ground rent income over the term of the lease.
This is normally calculated by applying a ‘years purchase’ multiplier to the current (and future) ground rent to calculate the approximate cost to the freeholder of buying an equivalent asset, that would produce the same kind of income over the length of the current lease.
- The ‘reversionary value’ of the flat
When your lease expires the freeholder will (in theory at least) receive the flat back with vacant possession. This future interest has a value in today’s money in ‘expectation’ of the return of the flat to the freeholder in the future.
It is possible to assess the current value of the flat (there are some adjustments to be made to take account of what the 1993 Act calls ‘qualifying improvements’ – essentially improvements to the property going beyond the basic obligation to maintain the flat) and then to ‘defer’ this into the future to the end of the current lease term.
This is done by applying a ‘deferment rate’ – essentially an annualised discount rate to the capital value over the number of years left on the lease. The current ‘discount rate’ for flats is generally 5%, although in certain circumstances it may be possible to argue for a slightly higher rate (which works in favour of the flat owner in the calculation).
There have been various tribunal cases on the deferment rate (notably Sportelli, Nailrile and others) which are much discussed among valuers. However, the net effect is that the flat’s ‘reversionary value’ is calculated and added to the ground rent compensation figure mentioned above.
- Marriage value
This factor only applies if your lease has 80 years or less to run.
If your lease has less than 80 years to run when the notice of claim is served, then there is an additional element of compensation to pay to the freeholder, which can be quite substantial and is often at least as much again as the previous two elements added together.
Marriage value represents the effect of the additional increase in value of the flat once the lease extension has been carried out.
In valuation terms, once the lease is extended the flat goes up in value. The difference between the old and new value is compared and, the additional uplift is then divided in two as part of a ‘profit sharing’ between the flat owner and the freeholder.
As the lease gets shorter, this jump in value can increase quite dramatically and is often assessed by reference to the relative distance between the short and long lease values (the so-called relativity). In practice this can be difficult to asses and reference is often made to graphs of recorded decisions or settlements that show the relationship between the lease length and the marriage value.
Another way of expressing marriage value is to consider that the effect of extending the lease is such that the freeholder’s interest is postponed effectively forever. As such the lease extension is a ‘once and for all’ chance to compensate the freeholder fully for the loss of the opportunity to re-unite the freehold and leasehold interests as the chance of putting the two back together again (or to ‘marry’ them) is now vanishingly remote.