Guide to Lease Extension Valuation
The premium needed to be paid for a new lease should be the total of:
The reduction in the value of the landlord’s ownership of the flat
That is the calculated as the difference between the value of his current interest with the current lease, and the value of his interest after a new lease is issued plus an extra 90 years. This is calculated as the loss of ground rent income for the remainder of the original lease (the term of the new lease is going to be at peppercorn [nil] rent) plus the loss as a result of the additional 90 years wait for the landlord before he theoretically gets the flat back.
The landlord’s share of the marriage value
This takes into account the potential increase in the value of a flat as a result of a new lease being granted. The Act requires that the profit is shared between the parties on a 50:50 split between the landlord and the leaseholder. Traditionally, this increase in value was calculated by reference to published graphs only; today account is taken of other short lease evidence, if available (adjusted on a hypothetical basis to reflect a world where no statutory extension is obtainable) and in some cases by reference still to graphs.
Compensation for loss as a result of the new lease being granted
This is to provide a solution to the landlord for any other reductions in the value of his interest in other property (Other property is defined as the flats in the building or the building itself) plus any loss or damage as a result of the new lease being granted. It is difficult to source examples of where a landlord could claim compensation because in most cases he will retain the freehold. Perhaps the only possibilities could be a claim for loss of opportunity. For example, the loss of opportunity to redevelop or the reconversion of a house of flats made back into a single family dwelling.
A formal valuation isn't required to be carried out by the Act, but it would be advised to have one completed. If the sum in a tenant’s Initial Notice is deemed unreasonably low it could render that Notice invalid; at the moment there is no such requirements on the landlord but taken advice is still preferable as there may be factors of which they are not aware.
Once received, the landlord may accept the leaseholder’s offer or respond in the counter-notice with an asking price. Hopefully, both parties will enter into negotiations and settle the premium. If this cannot be achieved then either party may make application to the First-tier Tribunal (Property Chamber), in agreement with the set timescales.
When serving notices, there isn't a requirement for a solicitor to be used. However, we do recommend this in all cases. To serve an invalid notice or be at of time is a common error and specialist advice should be sought.
How to choose a valuer
In the majority of cases, the valuer will be a Member or Fellow of the Royal Institution of Chartered Surveyors. However, there is no requirement that your valuer has a professional qualification. At the FTT (First-tier Tribunal), the valuer will have to show that the have the necessary expertise before any evidence is given weight. In either case, it should be ascertained that the valuer has suitable experience.
The following resources will help provide information about valuers:
- The Estates Gazette (EG) contains a directory on a monthly basis with a sub-heading of leasehold enfranchisement
- The Royal Institute of Chartered Surveyors recommendation services
- LEASE, the government sponsored non-departmental leasehold enfranchisement advisory service maintains a list of valuers (Note: valuers are not subject to any formal vetting process)
- ALEP, the Association of Leasehold Enfranchisement Practitioners
- Recommendation or previous experience - the preferred way
However the details of the valuer you use are found, take the time to briefly discuss the bare bones of the case with them. This will help you get a feel for their experience and how the solicitor and valuer might work together.
Being able to rely on the other professionals is important for both sides, and if there is no synergy, then complications may not be as easy to deal with.
It is worth asking whether the valuer tends to work more for landlords or tenants, or equally for both because some valuers have practices concentrating on one side of the process, and that might inhibit their giving the best advice to the client (or, of course, make them forces to be reckoned with!)
Where there are multiple tenants, and the original approach is from the solicitor, the valuer may prefer the solicitor to act as a single point of contact, unless one tenant is prepared to act in this role. It becomes expensive to expect the professional adviser to assume the administrative role, although there are some valuers and their firms who offer this service as an additional feature.
It is worth bearing in mind that if a report is addressed to a solicitor rather than the tenant(s) it may become legally privileged and discovery (the right of the opposing party to view the document in certain circumstances) cannot be sought.