Why do I need a lease extension valuation?
When you extend your lease, you are deferring the date at which ownership of the property reverts back to the freeholder.
To compensate the freeholder for the extra years that they will have to wait to regain full ownership, you must pay a price, known as a premium.
A lease extension valuation estimates how much the premium should be.
The amount is subjective, in that the calculation requires estimates of future values that are not known now. However, there are industry standard procedures for valuation that use current evidence available and that give you a range of what would be considered 'fair'. The lowest figure is the least that you should expect the freeholder to accept, and the highest figure is the most that the freeholder could reasonably demand.
The negotiation with the freeholder usually revolves around how the estimated values should be calculated, and therefore what the premium paid should be. As a result, the important result from the exercise is less often the figure that is the premium, but the evidence that justifies the figures used to calculate it.
How is a lease extension valuation calculated?
At the end of the day, the exact price that will be paid as a premium is the value that both the leaseholder and the freeholder agree on. You need to remember that although the process of valuing property is well defined, there are many subjective judgments in choosing figures to use in the calculations.
Generally, as the lease runs down, the more expensive it becomes to extend it.
If you follow the informal lease extension route, perhaps where you are a commonhold owner, the extension value could be calculated on any basis.
If you extend your lease via the formal proceedings set out in the Leasehold Reform, Housing and Urban Development Act 1993 (the 'LRA'), then that piece of legislation provides a method of calculation.
In essence, the premium is the value that the freeholder gives up by extending the lease (known as the existing freehold valuation), plus an equal share of any increase in value that an extended lease creates (the marriage value).
What the landlord gives up is:
- future ground rent for the remainder of the lease
- the difference in the value between the property at the end of the current lease, and at the end of the extended lease
- the opportunity once the lease has ended to develop the property to increase its value
Working through these calculations can be a complex process. It's why many homeowners seek professional advice from lease extension surveyors. They offer detailed reports, helping you pin lease extension valuations down, whether it's a formal statutory lease extension or a privately negotiated one.
The present value of future ground rent
Ground rent is the annual fee you pay your landlord as a leaseholder.
Since 2022, by law, when a lease is extended via the statutory route, the freeholder must accept to reduce ground rent to at most a peppercorn (in practice, zero).
To compensate, the premium can include an amount known as the term, which is the 'present value' of all ground rent payable over the length of the lease that the freeholder would have received under the current lease (including agreed increases).
To express the value of future payments in today's money, future payments are discounted at a value known as the term rate.
The calculation of the term rate can be complex. A valuation surveyor will typically look at recent sales at auction of similar properties that are rented to determine the yield (the ratio of income to capital value) that property investors require. Of course, there is subjectivity is deciding which properties to use to determine the term rate - there may not have been many recent sales of similar properties in your area that were also rented.
The term can have a reasonable impact on the overall lease extension premium if ground rents are high.
Difference in the reversion value before and after extension
The lease extension surveyor will estimate the current unimproved value of your property.
The law requires that the valuer disregard any increase in value to the property that arise from improvements you or a previous leasehold owner have made. For example, if you have added a conservatory, or refitted a kitchen, those improvements will not be considered in assessing the value. Any work beyond that required to keep the property in a 'basic maintained condition' should not be considered in the valuation.
The valuer will look for the difference in the current market value between similar (unimproved) leasehold and freehold properties in order to estimate increase in value that freehold ownership gives.
The unencumbered interest valuation is the future unimproved market value of your property as if it were freehold rather than leasehold.
To estimate it, the valuer is likely to take the unimproved value and multiply it by percentage increase that they have identified that similar freehold properties have.
Note that it doesn't take into account future changes in the property market that affect the sale value.
A multiplier is then applied to the unencumbered interest valuation. The is the present value of £1 discounted by an estimated yield over the remaining (current) lease term.
Then same calculation is made, but using the remaining lease term once extended.
The latter is subtracted from the former to give the loss of reversion that extending the lease gives.
As an example:
The valuation of your house is £325,000. A similar leasehold property on your estate (but without a conservatory like you have recently built) sold recently for £305,000. Your valuer decides to use £305,000 as the unimproved value.
Research shows that in your area, 3 bedroom freehold properties like yours tend to sell at a 10% premium to leasehold properties with 87 years remaining as yours has.
The unencumbered interest valuation is therefore £335,500.
Using a yield of 5% for 87 years, the multiplier is 0.01434, which means that the reversion on the current lease is £4,811.
The lease will be extended by the statutory minimum for a house - 50 years. A yield of 5% for 137 years has a multiplier of 0.00125, which gives a reversion on it of £419. The difference in reversions (this component of the premium) is therefore £4,392.
Marriage value
Marriage value is a unique concept in lease extensions.
It's the potential increase in the property's value once the lease is extended, essentially the extra value 'wedded' from combining the leasehold and freehold interests.
If your existing lease has less than 80 years to run, you're legally obliged to share the marriage value 50/50 with your landlord as part of the lease extension premium.
Your valuer is likely to apply a 'marriage value percentage' to the current unimproved value.
You can read more about marriage value and how to calculate it.
Who pays for a lease extension valuation?
It's usually the leaseholder who foots the bill for the valuation costs.
After all, it's you, the leaseholder, who is seeking to extend the lease. Your valuation surveyor is your professional adviser, providing you with crucial information about the likely cost of your lease extension premium.
Of course, you can obtain quotes from several firms and choose the best value.
In addition to your own costs, you'll be expected to pay the freeholder's 'reasonable costs'. These include their legal fees and possibly the cost of their own valuation surveyor.
You cannot choose who they use. But bear in mind, even costs are subject to negotiation and, ultimately, scrutiny by the tribunal if you can't agree whether they are reasonable.
Another point to remember is that the freeholder is not entitled to have their costs paid if they have not made reasonable attempts to negotiate in good faith.
Can you use an online lease extension valuation calculator?
You might stumble on online calculators promising instant estimates of extension valuations.
These give a great idea of the costs, but aren't as accurate as a professional leasehold valuation surveyor. That is because your surveyor will report in detail on your property's specific characteristics and location.
In any case, the freeholder will typically insist on a valuation by a member of the Royal Institution of Chartered Surveyors (RICS). You may be able to persuade them to use one surveyor rather their own in addition to yours.
An online valuation is also unlikely to be accepted as evidence at a First-tier Tribunal, which is where disputes about lease extension premiums might end up. The tribunal will look for detailed analysis and comparable properties, which only a professional valuation surveyor can provide.
What should my lease extension valuation surveyor do?
As well as carrying out the valuations, your surveyor is there to advise you on strategy. They may already have experience negotiating with your freeholder.
They will start by researching your property as it sits within the local housing market. They'll download plans and title deeds from the Land Registry. It is unlikely that they will need to visit the property for a lease extension survey because the condition is disregarded in the valuation.
They will then look at recent market data for comparable properties (including those with long and short leases) so that they have evidence of the value of your property.
If you pay a relatively high ground rent, they may also try to find recent examples of sales of freehold titles so that during negotiations over the premium, they can have evidence that the term component should be lower than if it were calculated using the actual ground rent.
Your surveyor will give you a valuation report that advises ranges that you should expect to pay, evidence of why, and possibly how to negotiate to your advantage.
Lease extension negotiation
If you follow the statutory leasehold extension route, then the first step is to serve initial notice on the freeholder of your intention to extend the lease. Your notice needs to offer a premium, which should be reasonable but low so that there is room for negotiation upwards.
Like any haggling, the freeholder is likely to respond with a counteroffer that is much higher than they reasonably expect. Discussions between your surveyor and theirs take place, where supporting evidence of each side's claim is presented to the other. If you have hired a good surveyor, they should have considered what the freeholder's surveyor might claim, and how to argue against it. There will be concessions to make, but most often the negotiations arrive at a figure that both sides accept.
If agreement isn't reached, then you have to apply to the First-tier Tribunal (Property chamber) who will determine it. The Tribunal is effectively a court, which means both sides will need further legal representation, which adds to your cost. Expect your freeholder to threaten to let the Tribunal decide the premium, but also be aware that it is in their interest to come to agreement beforehand.
What happens after my lease extension valuation is agreed?
Once you and your landlord agree on the price, you move forward with the legal work. Make sure that your valuer informs your solicitor that the terms have been agreed.
Either the agreement is formalised in a new lease, or a shorter document is produced that gives the new terms, and references the old lease for those that don't change.
The document must be registered with the Land Registry.
How to find the best lease extension valuer
When you look to hire your advisors, consider using a specialist integrated service provider that employs both lawyers and surveyors. They tend to cost less money and be more efficient.
You can appoint stand-alone professionals, but you may need to be more involved in their working together.
Instruct a specialist who only works for leaseholders
To present the strongest argument for why the freeholder's valuation is not acceptable, you need a surveyor who is up to date with the latest case law and who has plenty of negotiation experience.
You need a valuer who's unequivocally in your corner. A valuer who works for freeholders will not want to use arguments for you (particularly in a Tribunal) that might later be used against them when representing a freeholder client.
Choose a strong negotiator
Valuation is a different skill to negotiation. Some valuers are excellent at the technical part of the job, but lack the energy or dislike confrontation when it comes to the negotiation part.
The aim is to find an acceptable price for both sides without having to justify it to a Tribunal. A good negotiator will save you money.
Ask for a fixed fee
A fixed fee gives you certainty over your costs.
You might be offered a price that is based on a percentage of the difference between the landlord's initial offer and the end price. Be aware that if the freeholder starts unreasonably high, you'll end up paying a larger fee for a negotiation that was always going to come down.
If possible, find someone with recent experience of a Tribunal
If your lease extension negotiations reach a deadlock, the First-tier Tribunal may become your final arbiter.
This rarely happens, but the freeholder is more likely to want to avoid the risk of it if your valuer has recently won at one.
Frequently asked questions
Can you negotiate with your freeholder?
Absolutely. Negotiating is an integral part of the lease extension process.
After both you and the freeholder have your respective lease extension valuations and you serve notice, negotiation can begin.
You're not obligated to accept the freeholder's initial counter notice value and have the right to negotiate a lower premium.
How much does a lease extension valuation cost?
The cost of a lease extension valuation can vary significantly, primarily depending on the complexity of the valuation, whether you currently have a long lease or a short one and the surveyor's fees.
Expect to pay between £400 and £1,500 plus VAT.
This price should give you a detailed report, outlining the existing leasehold value, the value of the ground rent, and the marriage value.
Remember, you'll also have to pay additional costs: the lease extension premium, legal fees and the reasonable expenses of the freeholder.
How much does extending a lease increase the value?
A lease extension can add anywhere between 5% and 35% to a property's value, particularly for a short lease that has less than 60 years unexpired. However, it's important to note that every property is unique, and the impact on your property's value will depend on various factors.
The amount it does will largely depend on how short the existing lease is and the location of the property.