How Is The Leasehold Extension Premium Calculated?
Leaseholders seeking legal advice on the cost of extending their lease on a flat often find the uncertainty of the answer somewhat disappointing. However, even the most experienced professionals can in practice only offer a range of values of potential premiums to be paid. This is because the cost will depend on amongst other things the value of the property, the annual ground rent, the value of capital improvements, the potential rent to had from the property and the number of years left on the lease.
The legal basis of valuation
A lease extension on a flat is governed by Chapter II, Part 1 of The Leasehold Reform, Housing and Urban Development Act 1993. Under the legislation an extension actually means the lessee will be claiming a new lease for a period of 90 additional years beyond the end date of the current lease. Although the new lease will require a ‘peppercorn’ or nominal rent to be paid, the lessee must pay for the corresponding loss of value of the landlord’s interest in the flat which takes the form of a premium payable to the landlord for the granting of the new lease.
Despite the Act setting out the process for how such a loss in value should be calculated, because such a value is inevitably affected by a multitude of factors, extensive research into the property must be carried out. Even then the lessee is only likely to receive a range of potential values.
The leasehold extension premium calculation
In short, the premium extends to an accumulation of three elements:
First, the premium must sufficiently compensate the landlord for the loss in income from his ground rent for the remainder of the original lease (since the entire term of the new lease will be at a peppercorn rent).
Second, the premium must compensate the landlord for the loss in value of his reversionary interest, in the light of the granting of the new lease with an additional 90 years in it.
Third, half of the ‘marriage value’ must be paid (although only if the remaining term of the current lease is less than 80 years).
Here, the ‘marriage value’ refers to the difference between the total value of the landlord’s and tenant’s interests taken together prior to the granting of the extended lease and the total taken together after the granting of the extended lease.
Additional expenses on leasehold extension
There are a number of expenses that leaseholders must be aware of before entering into the leasehold extension process beyond the premium itself. Typically, due to the complexity of its determination, a chartered surveyor specialising in Leasehold Reform valuations must be consulted to carry out the valuation and negotiation of the premium. In addition, legal fees will need to be taken into account, including disbursements and fees involved in updates to the land register.