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Assessing a Fair Lease Extension Premium: The Impartial Approach

Monday, 15th September 2014 | by: Steve Hobbs

The statutory lease extension process, as with so many Landlord and Tenant matters, is traditionally adversarial. However, it need not necessarily be so. In most instances the leaseholder simply wants to extend their lease with the minimum fuss and expense and without being extorted in the process. Likewise, many non-institutional freeholders are simply concerned with ensuring they receive a fair premium for the extension.

Leaseholders have the right to extend their lease by 90 years, and do away with their ground rent under the Leasehold Reform, Housing and Urban Development Act 1993. The Act prescribes that in order to enact this right the leaseholder must serve notice on the freeholder. As soon as notice is served the leaseholder becomes liable for the freeholder’s reasonable professional fees, including their surveyor’s and solicitor’s costs. This leads to two sets of valuation fees (one for the leaseholder and one for the freeholder) and the inevitable ensuing negotiations between the two surveyors in order to agree the fair premium. In the worst case scenario (although rare) the case can end up at Tribunal, costing both parties thousands of pounds in non-recoverable costs.

Recently, our Chartered Surveyors have worked on a number of cases on an impartial basis, jointly instructed by the freeholder and leaseholder to determine the premium payable in accordance with the statutory valuation process. Typically the valuation fees are paid by the leaseholder.

This informal approach allows both parties to be assured that their interests are being adequately represented without running up two sets of valuation fees. It also allows for the consideration of bespoke proposals, whereby a smaller premium might be agreed in return for a shorter extension and the retention of some ground rent, allowing the freeholder to retain some value in their reversionary interest, and the leaseholder to save some money in the process.

Such an agreement is particularly sensible in situations where the unexpired term of the lease is in excess of 80 years and, there being no marriage value payable, the value of the premium is sometimes lower than the professional fees!

If you are a leaseholder on good terms with your freeholder, or a freeholder who has recently been approached by a leaseholder wanting to extend their lease, you might wish to consider whether an impartial assessment of the fair premium payable would suit your requirements. Whatever your situation, our specialist Chartered Surveyors are on hand to help.