As the buyer you cannot extend the lease
This means that if you are going to extend the lease on the property you are buying, you are going to need to get the seller to do it for you. You'll need to agree the route to take, formal or informal, and who is going to pay for the lease extension costs and the premium - read about the costs of extending your lease.
What do you need to calculate the lease extension premium?
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1
Current value of unencumbered interest
This is the valuation of the leasehold property in its current condition with a long lease (not the current value with a short lease (less than 89 years).
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2
Existing Leasehold Value
This is the valuation of the existing leasehold in its current condition with it current lease length; often considerably lower than the value of the unencumbered interest as the property is worth less the shorter the lease.
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3
Ground rent including increases
The ground rent within your lease rarely remains the same during the full lease term so a RICS surveyor will need to see sight of the lease to work our the 'Existing Freehold Valuation' part of the valuation. Click to read more about 'Ground Rent'.
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4
How many years you wish to extend the lease by
Under the formal route this will be fixed at 90 years on top of your current lease term, however informally it can be for anything from 1 to 999 years.
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5
Term rate, Reversionary Rate and Relativity
These rate are applied by your surveyor to calculate the Existing Freehold Valuation.
How to calculate your lease extension premium
The lease extension valuation has two elements to it; Existing Freehold Valuation and the Marriage Value. You'll see as we move on that the marriage value rate increases the lower your unexpired lease term goes which is why it is important to extend your lease before you lease goes below 80 years.
Existing Freehold Valuation
This first stage of the valuation which looks at:
- Term The Term is calculated using the years purchased showing the depreciation of the ground rent using the Term Rate (this is selected by the surveyor); added to
- Reversion The Value of Unencumbered Interest (current purchaser price) with a Reversionary Rate applied over the unexpired term of the lease using the 'Present Value'.
The Term and the Reversion are added together to give the Existing Freehold Valuation total. This will need to be added onto the second part of the calculation; the marriage value.
Marriage Value
The marriage value is calculated by deducting off the Existing Leasehold Value (current property value with a short lease) and the Existing Freehold Value. This sub total then has the marriage value percentage applied to provide the marriage value.
Do you always have to pay for your freeholder's valuation?
Yes you do, however, some freeholders might accept your lease extension valuation and waive requiring you to pay their RICS surveyor to provide comparisons as long as you supply a RICS lease extension valuation. This way, you might save on the freeholder's valuation equating to £600 to £1,500.
Can you negotiate with your freeholder's valuation?
You can negotiate with the freeholder which is why you always need a qualified RICS surveyor who is competent to provide lease extension valuations to provide their opinion on the premium. If this differs to the freeholder's opinion or survey, then your surveyor can discuss the reason for the difference with the freeholder's surveyors (normally chargeable at an hourly rate so speak with your surveyor to find out their hourly rate).
NB Mundy v. the Sloane Stanley Estate and the Court of Appeal
The Court of Appeal is set to rule on this long-running lease extension case re: lease extension premiums and many commentators have stated that this may result in a significant reduction in premiums payable.
Therefore the figures below may, depending on the Court of Appeal's ruling, be subject to change: this must be taken into account. You should always consult an appropriately-qualified expert for advice if you are looking to find out how much your premium is likely to be if you yourself are seeking a lease extension.
Need a lease extension? For an unbeatable quote call 0333 344 3234.
* RICS Surveyors – Local Market Knowledge – First-tier Tribunal Compliant - Competitive Prices
