The most difficult elements of the process of collective enfranchisement is working out what the leaseholders should pay and how the freeholder is to be compensated for his loss of ground rent.
To show how this is worked out, the following example is sourced from the LEASE website:
- A block of 10 flats with 68 unexpired years remaining each have a ground rent of £50 per year. The individual market value of each flat with its existing lease is £150,00
- The total ground rent for the block is £500 p/a, which is 10 x £50. This figure is then multiplied by what is known as the Years Purchase, a multiplier taken from valuation tables or sometimes calculated by the valuer. To obtain this figure the most important part of the calculation is the assumed yield percentage and it is this that is likely to cause the most disputes between the valuers of both sides.
- Valuers will scrutinise local freehold auctions, looking at the unexpired terms and ground rents paid in the open market and will be able to calculate the assumed yield percentage in reverse from the evidence. The valuers will also need to be aware of the individual circumstances of the sale because the base information available from the auction results may not always provide completely accurate evidence on which other calculations need to be based.
- So if the yield is taken as 8%, the Years Purchase figure is then looked up in the tables where 68 unexpired years at 8% is 12.433. £500 for ground rent is then multiplied by 12. 433 which equals £6,216. This is the estimated price a property investor would be prepared to pay today for a fixed income of £500 p/a for the next 68 years to produce a yield of 8%.
Reversion – Vacant Possession
At the end of the lease the flat becomes the property of the landlord who would expect to either sell or re-let it. Vacant possession is the price a buyer in the open market would be prepared to pay today for the right to recover vacant possession of the flat when its current term expires. Therefore the current value of the flats is £150,000 x 10 flats = £1,500,000 (the leaseholders present interest).
What happens when there are improvements to the property can be read here.
The next stage of the process is that of the serving of the initial leaseholder notice and the landlord counter notice which can be read here.