Lease Extension Report Information

Additional supplementary information for your lease extension report

The following pages are intended to provide further information and helpful background advice to our clients and are intended to be read in conjunction with our standard form of lease extension report.

You can either click on the headings within your PDF report and be taken direct to the relevant section, or just browse through the tabs below to familiarise yourself with the various sections in your report.

General Description

This section of the report is merely intended to be a brief overview of the subject property. Its intention is to provide an idea of the type, style and accommodation within each property for a reader of the report which is not familiar with the layout, for example, a solicitor.

Tenent's Improvements

For the purposes of our valuation, any effect on value of improvements carried out either by the current leaseholder or their predecessors in title should be disregarded. The valuation given reflects what is known as an ‘unimproved value’ of the flat. Furthermore, improvements are defined as additions or alterations which are not merely repairs or renewals and therefore items such as the installation of a new kitchen or bathroom, which are clearly renewals, would not be considered as improvements for the purposes of this valuation.

It is not the cost of any improvements which will be taken into account, but merely the effect on value. For example in the case of double glazing, it would not be the cost to install double glazing, (assuming it had not been installed previously), but the addition to the value of the property which is often far less than the original cost and in any case, depreciates yearly.

Discounts to value are therefore generally only considered in cases which increase floor area, or which modernise the fundamental elements of the property beyond the scope of expected maintenance. Again, what we also need to stress is that it is the increase to property value which is considered and not the actual cost of the works. Examples of improvements which would necessitate a discount would be items such as extensions to ground floor flats, or loft conversions to upper floor flats.

Tenure

This section simply provides a brief summary of the pertinent details from the lease of the subject property, to enable a reader to have all the relevant lease details to hand without having to refer to the original lease document.

Valuation

The process of valuation for a lease extension is comprised of several variable factors which are determined by the experience of the valuer, the data available at the time of valuation and published case law from the various tribunals and courts.

The first element to be determined is the freehold vacant possession value (FHVP). The preferred method to establish this element is to value the leasehold property as if it were freehold and then using either a relativity percentage or relevant transactional data to backwards calculate the value of the existing lease. It is commonly accepted that the difference in value between a leasehold property with 80 years or more to run and a freehold property is negligible, although an adjustment of 1% is often made to reflect the difference between a long lease and a freehold tenure.

In order to ascertain the FHVP, we must first ascertain the value of the property as if it were freehold for which we have used comparable evidence of the sales of recent similar property in the locality. This generally results in a range of values which are given within our report. However, the premium is established by a range of other factors which are generally determined by the valuer’s experience, case law and transactional data. These are summarised in the table under component parts.

Component Parts

Capitalisation Rate

The capitalisation rate is the second element in calculating the premium for the lease extension (after the FHVP) and stems from the loss of the landlord’s ground rent income. A multiplier is generally adopted stemming from the valuer’s experience and various case law which results in a capitalisation rate which is given in the table in our report. We give a range of capitalisation rates (as we do with most values) as this is not an exact science but merely based on the experience of ourselves and the valuers acting for the other side.

Deferment Rate

The deferment rate is the value attributed to the right of the freeholder to receive the property back at the expiration of the lease. This is arrived at by deferring the capital values for the remainder of the unexpired term via a multiplier used to produce an investment value, i.e. what is the promise of the future flat value is worth today. This element is generally determined by case law and is rarely altered except in extreme cases.

Relativity and Marriage Value

The relativity percentage determines the value of the short lease property in comparison to the value of a flat with in excess of 80 years unexpired. Where a flat has over 80 years unexpired, the relativity percentage is always 100% and therefore there is no marriage value payable. For flats with less than 80 years unexpired, marriage value is payable and therefore relativity will be less than 100%. Relativity is determined by sales of recent short lease flats in the vicinity, or by reference to various graphs published by both the RICS and other reputable bodies, and again is determined by the experience and view point of the valuer and is often a point of contention between valuers for leaseholders and valuers for freeholders. Our report gives a range of values which we would expect this element to be agreed at, and using the relativity, a short lease value of the property is determined and given in the calculations within the report.

Freehold Vacant Possession Value (FHVP)

The calculation of FHVP has been discussed previously (here)

Premium

By combining all of these various factors, capitalisation rate, deferment rate, relativity and FHVP, the valuer is able to calculate the premium due for the lease extension. Due to the number of factors involved, this is rarely a simple exercise and again is a matter of opinion for the valuers involved rather than a simple black or white calculation – hence within our reports, we give a range of values which we would expect the premium to be settled at.

Valuation Calculation - Low

This is the calculation resulting from the variable factors discussed under component parts and is generally the lowest figure which we would expect to settle at.

Valuation Calculation - High

This is the calculation resulting from the variable factors discussed under component parts and is generally the highest figure which we would expect to settle at.

Valuation Calculation - Notice

This valuation calculation is to determine the figure to be included within the notice served by your solicitors. It is primarily for their use and is a starting point for negotiations. It is not a figure which we would expect to settle at, but in accordance with legislation, is required to be a reasonable figure from the leaseholder (although freeholders are under no such obligation).

Floor Plan

The floor plan is given merely to provide an indication of the layout of the property to readers of the report who are not familiar with it.