Page 2 - lease_extensions

A step by step guide to lease extensions 1

Step 1 - Get valuation advice

What's in a lease extension valuation?
The first thing that you need to understand about lease extensions is that while your lease is
valuable to you today, at whatever price it would command on the housing market, your lease
is also valuable to your freeholder. This is because he/she:

• Receives investment income from it in the form of ground rent;
• Has the ‘hope value’ of a premium from you (if you decide to
buy a lease extension) and
holds the ‘reversionary interest’, which is the value of a vacant
flat in XX years time at the end of the lease term

This is a specialist area of valuation that requires the services of a professional valuer. The
valuation methodology involves the following elements:

1. Market value of the flat for properties with less than 80 years unexpired on the basis of

A. a short lease with ground rents payable as covenanted under the lease
B. a long lease with peppercorn ground rent payable (existing term + 90
years)
2. The value of the landlord's interest
A. ground rent receivable as covenanted under the lease
B. present value of the reversionary title (a vacant flat with long lease) once
your lease has expired
3. Marriage value - this is the difference between 1(A) and 1(B)

Understanding valuation methods
Using industry-standard valuation methods enables us to calculate the present value of the
future right to your vacant flat and to value the ground rent (which represents an income
stream for a set term of years).
The valuer will consider market evidence and settled case-law to select the appropriate
capitalisation rate upon which to base our valuation of the ground rent. In simple terms this
could be a rate derived from or comparables such as gilts yields (gilts are government bonds),
interest rates paid on bank credit balances, the bank base rate and a premium for the perceived
risk of investing in property etc.

He/she will select the appropriate ‘deferment rate’ by which it is reflected that the reversionary
value to the landlord is some years away.

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