Lease Extensions: Freehold Report and Valuation Breakdown
The freeholder valuation is payable by the leaseholder under s60 of the 1993 Act, which states that where such a notice is served, the leaseholder is liable for the reasonable costs (of) and incidental (to):
- Any investigation reasonably undertaken of the tenant’s right to a new lease;
- Any valuation of the tenant’s flat obtained for the purpose of fixing the premium or any other amount payable by virtue of Schedule 13 in connection with the grant of a new lease under s56 and;
- The grant of a new lease under that section.
The information comes in two parts: the report and a valuation breakdown.
1: THE REPORT
The report reads like this.
I have been asked to provide valuation advice following receipt of a Section 42 Notice under the Leasehold Reform, Housing and Urban Development Act 1993 (the 1993 Act) by the tenant of this flat. This report is for the benefit of the Freeholders of (insert development name here) only and is not to be assigned or relied on by any third party. I confirm I have no conflict of interest in the matter.
The tenant having served a Section 42 Notice is entitled to a 90 year extension to the present lease with the ground rent immediately reducing to a peppercorn (£nil). This report and valuation provides advice as to the correct premium to be paid and a suggested figure to include in the landlord’s Counter Notice. The tenant’s Section 42 Notice is dated (insert date) and this date sets the valuation date. The Counter Notice is to be served by (insert date).
The tenant’s present lease is for 99 years from 25th December 1971 so at the valuation date, it had approximately 57.25 years unexpired. The new lease will therefore be for 147 years. Under the present lease, the initial ground rent was £xx rising at 33 year intervals to £xx and then £xx. The rent payable at present is £xx. On completion of the new lease, no further ground rent will be payable.
I inspected the flat on (insert date). This is a standard small one bedroom flat on the ground floor at the rear of the buildings. It is in serviceable condition although dated. I did not carry out a structural survey of the premises. Should a detailed report on the condition of the building be required, a further inspection and report will be required.
To calculate the premium payable for the lease extension, the valuation method is set out in the 1993 Act. This requires the valuation to consist of the following component factors:
- The Value of the Landlord Present Interest which is the right to receive the ground rent income for the term of the lease and the right to receive the flat back at the end of the lease, with vacant possession (the reversion);
- A Share of the Marriage Value which is the value attributable to the increase in the value of the flat when the lease has been extended. The Commonhold and Leasehold Reform Act 2002 sets the share of the Marriage Value for the Landlord at 50%.
- Compensation for any other loss suffered by the landlord such as the loss of such matters as development potential. I do not believe there is any possibility of further development at this address. In my opinion, there is no claim for loss under this heading which the landlord could raise.
The capital value of the ground rent income is calculated by capitalising the years purchase formula (YP) the ground rent income with the value of future rent increases deferred by applying a ‘present value’ (PV) multiplier as shown in the attached valuation.
I am of the opinion that the appropriate yield for capitalising the rent is 7% which I have used in my valuation.
The value of the reversion is calculated by applying the PV multiplier to the freehold value of the flat. Over the past few years there have been a number of cases heard by the Upper Chamber (previously the Lands Tribunal) where a yield rate for calculating the reversion has been settled at 5%. I have used this yield rate in my valuation.
To calculate the value of the reversion and the marriage value, I need to establish the value of the flat, as if freehold and the value of the flat with the present lease. I have looked to see what flats have sold recently and if there are any on the market. I have the following sale details and in the right hand column I have shown the updated value using the Nationwide House Price Index. All these flats sold with the original leases:
- Flat x sold March 2013 for £x now £x
- Flat x sold October 2012 for £x now £x
- Flat x sold August 2010 for £x now £x
There are number of one bedroom flats in the area, in converted houses, on the market with asking prices from around £150,000 to £180,000.
Modern Fairview one bedroom flats in the area are selling for around £165,000 with a good lease and Fairview studio flats (probably with an overall size comparable to these flats but without a separate bedroom) are selling for around £135,000.
This flat is generally in reasonable condition with modern double glazed windows. To allow for up-dating the kitchen and bathroom and fitting gas central heating, I am of the opinion that the value of the flat, as if freehold, is in the region of £140,000.
It is standard practice to take the value of the flat with a new long lease at 99% of the freehold value, in this case 99% of £140,000, i.e. £138,600.
The sale figures above give an indication as to the value of the flat with the present
lease. To follow the normal procedure for this type of valuation, I have taken the value of the flat with the present lease at 80% (80% relativity) of the freehold value, i.e. £112,000.
The values attributed to the property are in the context of the valuation for a lease extension under the 1993 Act and must not be taken as a valuation of the property as a realisation price should it be offered for sale.
I attach a copy of my valuation from which you can see that in my opinion the compensation to be paid to the freeholder for an extension to the lease of this flat, in accordance with the 1993 Act, is £17,943.
The Counter Notice to be served on the tenant must admit or deny the tenant’s right to a new lease (there are very few grounds for denying the right) and state which parts of the Notice are accepted and which parts (usually the price) are not accepted. It is most likely that the figure in the tenant’s Notice is an ‘opening shot’ (although it must be realistic) with room left for negotiation.
The figure for the Counter Notice should also be realistic but at the same time should leave some room for negotiation. If I increase the freehold value of the flat to £x and take the value of the flat with the present lease at 79% of the freehold value, the premium comes to £x. Accordingly, I suggest the Counter Notice is served at a figure of say, £x
The worst case scenario might be if we had to accept a freehold value of the flat atonly £x and a relativity of say 83%, the premium would drop to £x. I trust this report and the attached valuation are clear. Please let me know if I can
provide any further advice at this stage.
2: THE VALUATION
The valuation reads like this:
- Valuation Date
- Value of the flat as if freehold; £x
- Valuation of the flat with long lease (99% of freehold value); £x
- % of freehold value; 80%
- Value of flat with present lease; £x
- Yield rate (%) ground rent; 7%
- Yield rate (%) reversion; 5%
- Unexpired term; 57.25
- Present ground rent; £20 for 0 years
- First review to £40 for 24.25 years
- Second review to £60 for 33 years
Valuation of Present Interests: Freeholder
Present rent; £20
YP for 0 years at 7% = 0 = £0
Ground rent 2; £40
YP for 24.25 at 7% = 11.5166
PV for 0 years at 7% = 1 = £461.00
Ground rent 3; £60
YP for 33 years at 7% = 12.7538
PV for 24.25 years at 7% = 0.19384 = £148.00
Reversion to Freehold value (value) = £140,000
PV of £1 for 57.25 years at 5% = 0.00076 = £106
TOTAL = £9.074
LESSEE – £112,00
Calculation of Marriage Value
Freeholder = £106
Lessee = £138,600 + freeholder value of £106 = £138,706
Lessee £112,000 + freeholder value of £9,180 = £121,180
Landlord’s 50% £8,763
Compensation Payable to Freeholder
Present Value £9,180
Share of MV £8,763 + present value = £17,943