Entering the world of Leasehold Reform can be a daunting and confusing journey. We attempt to explain some of the common terms and valuation factors that are often used when discussing this subject.
Relevant Valuation Date
The valuation date for assessing the premium is not the date a surveyor’s report is prepared, but the date that the landlord receives the Section 42 Notice.
The basis of value is found in Section 13 of the Act. The Act requires the following elements to be considered:
i.) The diminution of value in the landlord’s interest in the flat [reduction in value],
ii.) The landlord’s share of the marriage value,
iii.) Any other amount of compensation payable. [This is relevant if there is a headlease]
Calculating the diminution of value in the landlord’s interest:
This is the sum of the:
i) The capitalised value of the rental income to be derived from the existing lease;
ii) And, the present value of the reversion in the flat before the lease extension.
iii) The present value of the reversion in the flat after the lease extension.
The capitalisation of the ground rent income is at its basic level: “how much is the rent income from the lease worth if paid in a lump sum”.
The present value of the reversion is the discounted value to the freeholder of getting the flat back at the end of the lease, subject to any risk to obtaining possession.
A surveyor will consider negotiated settlements, recently published Tribunal decisions, together with experience and Case Law.
Marriage value is specifically defined as the difference between two amounts: The sum of the tenant’s, (the head landlord’s) and the freeholder’s interests, before and after the lease extension.
In effect, marriage value is any profit released from the grant of the lease extension. The landlord and tenant share this 50:50. The marriage value is to be ignored if the unexpired term on the lease is more than 80 years.
Relativity is the expression as a percentage of the difference in value between a short lease and an effective freehold flat (i.e. one with a 999-year lease at peppercorn rent or “Share of Freehold”). The higher the rate, the lower the premium. The calculator works of a general trend-line off many published graphs. The RICS (Royal Institution of Chartered Surveyors) in 2009 produced graphs of relativity. The higher the rate, the lower the marriage value in the premium.
There must be disregarded any increase in value of a flat held by a tenant which is attributable to an improvement carried out at his own expense by the tenant or any predecessor in title. There is a significant amount of case law on improvements.
Repair of worn out items would not qualify as improvements. Case law suggests that structural works are required such as structural works including the strengthening of kitchen units to facilitate the installation of granite worktops and the like. Simple replacement with a modern day equivalent would be improvement.
It is necessary to assume that the tenant has complied with their obligations insofar as they are able to, to keep the flat in lease compliant condition. Any disrepair internally or externally due to the landlord is not ignored.
“The Non-Act World” and Other Matters
The valuer should also consider in short lease properties the risk of an assured tenancy at the end of a lease. There is a provision in the Act and ancillary Acts for a tenant to remain in possession after the lease ends, at a rent.
The type of tenancy at the end of the lease will depend on historic rateable value (or in the case of newer build flats, the value of R). If a tenant lives at the property and there is sufficient risk of a tenant remaining, it may be possible to reduce the value of the premium significantly.
Statute says that you need to assume that the value of the short lease is in the “no Act world”, in other words, before you had the right to extend your lease or buy your freehold.
Consider how much you would discount the value of a leasehold property if you were never able to obtain a lease extension or buy your freehold. The decision in the Nailrile case was that the relevant discount for the “benefit of the Act” was 7.5% for a 44-year lease.
In the market you can extend your lease because of the 1993 Act. Therefore, it is necessary to consider how much of a discount there needs to be to reflect this right. The calculator works of the value off the existing lease (i.e. the short lease). If you have entered the market value of your short lease, you need to discount this. This will reduce the premium.
Consider how much you would discount the value of a leasehold property if you were never able to obtain a lease extension or buy your freehold. Re-try the calculator discounting the short lease value, for example:
By 2.5%-5% for a 60-80 year plus lease;
By 5-10% for a lease between 45 and 60 years;
By 10-15% for say 30 to 45 year lease; and
By 15-35% for shorter leases.
This rate is used to calculate the Years Purchase multiplier to generate the present day value of the ground rent. There are Tribunal decisions ranging from 5% to 10%. This variance depends on the level of rent and the frequency and the amount of the review. There are properties in prime central London (PCL) where the level of ground rent is a proportion of the market value or annual rent if the flat is let on a short term tenancy, such as an AST. The calculator solely works off 7%. Again, the higher rate, the lower the compensation paid to the freeholder in the premium.
Deferment or Discount Rate
Prior to Sportelli (2006-2008) this varied through out the country and throughout central London. This case introduced the concept of a generic (nation-wide and property-wide) rate of 5%. Overnight most premiums adjusted upward by 5%. We consider that 5% is the applicable starting point in light of Alexander Voyvoda and (1) Grosvenor West End Properties (2) 32 Grosvenor Square Ltd LRA/52/2012;  UKUT 0334 (LC). Our calculator only works off 5%: The higher rate, the lower the premium.
Valuation of Premium
The valuation will produce a range of figures due to the valuation factors noted above. That range would be a quoting valuation (best case scenario) an expected settlement range based on an upper and lower valuation.
For the purpose of quoting the premium payable within the Notice to be served (Section 42) on the landlord or Counter-Notice (Section 45, from the landlord) the Best Case will invariably be quoted.
A caution for a tenant is that if you quote too low (an unrealistic figure) you may risk costs and up to a year or more delay.
Negotiation of a claim
As both the landlord and tenant are likely to quote their “best case” valuation, the negotiation of the premium to extend your lease is the most important element.
A good negotiator can save or gain his client substantial sums of money. It is for this reason why fees quoted for the initial valuation are not the most crucial aspect.
Important Note on Associated Costs:
In the event that tenants exercise their right (serve a Section 42 Notice) under the Leasehold Reform Housing and Development Act 1993 (as amended), the tenants will be liable for the landlord’s reasonable costs in determining the premium payable (valuation costs) and those of the landlord’s solicitor in respect of dealing with the notice and in the event of the matter proceeding, the conveyancing costs. The tenant is liable for these whether or not the tenant proceeds (save as to the conveyancing costs).
In the event that the matter proceeds to a First-Tier Tribunal, both sides bear their own costs relating to the Hearing. As with the determination of the premium, the FtT can assess the legal and valuation costs.
Each party will also be responsible for their own costs during negotiations in most instances.