Video explains the four basic calculations required to work out the cost to extend a lease.
“Hello there. So you have a leasehold property. A leasehold flat or a house that’s leasehold and you wish to extend the lease. So how is that valued?
This video is just a very simple introduction to the calculations that go on behind the scenes to value a lease and value the costs to extend a lease. [And] this is all covered within legislation how the basic calculation is done but you will need to get involved a professional chartered surveyor or something like that to work, to assist you in working out the value for a lease extension because you may assess value for the lease extension and obviously the freeholder, the person, you're trying to get them to extend the lease or the company they may have a totally different valuation.
[Slide] 4 Elements to Valuing Lease Extension
There are four basic elements to valuing a lease and the first one is:
1. The Term - the term calculation. What that effectively is, let's say your lease you pay £100 a month, sorry £100 a year ground rent. Now, to value that, let’s say you’ve got 70 years left on your lease where you are required to pay £100 a year. That has a value and that first calculation works out: well, if an investor wanted to receive £100 per year guaranteed for the next 70 years how much would they need to invest? And that gives the first element of ‘right’ we’re valuing the term. It is if I have got 70 years left and the lease is a £100 per annum how much would somebody have to invest to get £100 per annum guaranteed for 70 years. So that part 1.
[Slide example calculation]
2. Part two is what is known as a reversion value. Now the reversion value is, in simplistic terms, if the lease runs out how much is the value of the residual element though the land technically [the rubble of the building].
[Slide example calculate reversion value]
3. The third part is something called the diminution: the reduction in the landlord's interest. So by looking at let’s say you’ve got 70 years left on your lease and you extend your lease by another 99 years for example. The freeholder they’ve got a reduced interest in that property now because they are not going to be able to access their land for a further 99 years. So there's been a diminution, a reduction, in their interest, in the value. [And] we do a calculation to work that out.
[Slide example calculation diminution landlord’s interest]
4. And then the fourth element is the marriage value. What the ‘marriage value’ is looking at you as the property owner, the leaseholder, it's what is this all worth to me? How much is my property worth to me with only a 70 year lease remaining? How much is it worth this property? How much could I sell it for, in simplistic terms, compared to how much would my property be worth if I extended the lease by a further 99 years? So you have how much is it worth today? How much is it worth with the new lease? And that’s called the ‘marriage value’.
[Slide example marriage value calculation]
So in simplistic terms, what's going on when we’re working out the costs to extend the lease number.
So hopefully that gives you an idea of how a surveyor would work out the cost to extend the lease on a leasehold flat or house.
There are clearly are opportunities for dispute because the freeholder may have a totally different, or say to you: “Right, this is going to cost you £10,000, £20,000, £30,000 to extend your lease” and you may evaluate it and go: ‘it’s just not worth it’. So there are potentials for dispute, as ever, and there is something separate where it used to be called The Leasehold Valuation Tribunal, Tribunal I should say. That has now changed, where the government has something called basically The Leasehold Advice Service and I’ll give details of what happens if there is a dispute on the costs to extend the lease in a separate video. Thanks very much for watching.”