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Lease Extension Valuation

Andrew Boast

16/04/2019

A lease extension valuation is required as part of the process to extend your lease. The valuation can be arranged either:

informally for any number of years (up to a maximum of 999 years); or
formally for an additional 90 years on top of the current lease term. The valuation is calculated using the formula in the Leasehold Reform, Housing and Urban Development Act 1993 Schedule 13 - Premium and other amounts payable by tenant on grant of new lease.

The lease extension valuation calculates the amount you'll need to pay your freeholder to add an additional number of years to your current lease term. In most circumstances this will be under the formal statutory lease extension where you add an additional 90 years onto your current lease term. There are times where you'll do a lease extension informally for a varying number of years and want to to double check the lease extension premium being asked of you by the freeholder to extend.

In our article below we examine the how the lease extension valuation works out your premium to pay to your freeholder for any number of years; either formally or informally.

Can you use an online lease extension valuation tool?

Online lease extension tools should only ever be used to estimate what you could be liable to pay for your lease extension, however you should never use this for any formal offers to your freeholder because of:

Inaccuracies Online calculators are not accurate as there are variables that only a qualified RICS surveyor can provide such as the Reversionary Rate, current market value (with and without an extended lease), Ground Rent increases and the Relativity Applied. Errors within an offer to extend with your freehold can delay the process and also leave future negotiations scarred by the freeholder feeling your expectations are too low compared to the actual lease premium.
Additional Costs If you provide an online calculation then your freeholder will look to get their own lease extension valuation from their own RICS surveyor for whom you will need to cover the costs for. If you present your own lease extension valuation from a RICS surveyor of your choice, you may find your freeholder will choose to not get their own as you have used a qualified professional to confirm the premium you should pay.
Not able to use at First-tier Tribunal If you can't agree a premium to pay for the lease then you'll need to go to the First-tier Tribunal and they will not accept an online lease extension calculation as evidence of the premium to pay.

Click to read out guide on How to Successfully Negotiate your Lease Extension Premium with your Freeholder

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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?

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).

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.

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'.

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.

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.