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Leasehold Valuation Calculations – 2 Worked Examples

Saturday, 12th March 2011 | by: Peter Barry

Over the course of the last few posts we have tried to explain the process of granting a new lease under the terms of the Leasehold Reform and Urban Development Act 1993. We’ve looked at the various elements that have to be taken into account in calculating the premium that the lessee will have to pay to the freeholder and thought that it was about time that we now looked at a worked example of a typical case.

We have talked quite a bit about the concept of ‘marriage value’ and how important it is to apply for a new lease while the existing lease still has more than 80 years to run.  In order to demonstrate this we will look at two flats which are identical in every respect, except that one has a lease of more than 80 years and one has a lease of less than 80 years.

Let’s assume that our two flats are situated next door to each other in High Street, Anytown. They are both two-bedroom, purpose-built flats of identical design.  The first property is 123, High Street. It has a 99 year lease which commenced on 25th December 1980. The lease will expire on 24th December 2079 and at present has an unexpired term of 68.83 years.

The second property is 125, High Street it also has a 99 year lease, but this lease commenced on 25th December 1995. This lease will expire on 24th December 2094 and at present has an unexpired term of 83.83 years.

Both flats have a ground rent which is set at £50 per year for the first 33 years of the lease and then rises to £100 per year for the next 33 years and £200 per year for the final 33 years of the lease.

For the purpose of this exercise we will assume that both flats will have a market value of £200,000 with a new long lease.

In our previous blogs we have discussed how the freeholder has to be compensated for the loss of ground rent, the potential reversionary value of the flat at the end of the original lease and a share of the ‘marriage value’ if the existing lease has less than 80 years to run.

Let’s look at the calculation for 123, High Street first.

Property 123, High Street, Anytown
Valuation Date

11/03/2011

Lease Details
Date

25/12/1980

Term (years)

99

Expiry Date

24/12/2079

Unexpired Term

68.83

years

VALUES
Value following purchase of extension say

£200,000

Percentage relativity

90%

Current lease value

£181,818


Diminution in Value of Freeholder’s Interest
Term 1 RENT

£50

X YP

2.83

YEARS @

8%

2.4464

£122

Term 2 RENT

£100

X YP

33

YEARS @

8%

11.5139

deferred for

2.83

years

0.8042865

£926

Term 3 RENT

£200

X YP

33

YEARS @

8%

11.5139

deferred for

35.83

years

0.0634493

£146

£1,194

Reversion To share of freehold with vacant possession

£202,020

X PV

68.83

YEARS @

5%

0.0347969

£7,030

Total Diminution

£8,224

Calculation of Marriage Value
Value of flat with extension

£200,000

Reversion X PV 158.83 Years @

5%

0.0004310

£86

Aggregate value of interests after grant of new lease

£200,086

Less

Existing lessee’s interest

£181,818

Total of Landlord’s existing interest

£8,224

£10,044

Take 50% Marriage value

£5,022

TOTAL

£13,246

From the above example we can see that the total amount that will have to be paid by the lessee is £13,246. This is made up of three elements:-

Loss of ground rent  – £1,194

Loss of reversion  – £7,030

Share of Marriage Value  – £5,022

As we have discussed before the ‘marriage value’ is basically the difference between the aggregate values of the freeholder’s and lessee’s interests before and after the grant of the new lease. The legislation says that the ‘marriage value’ is split equally between the freeholder and the lessee, so in the example above the freeholder is entitled to £5,022 under this heading.

Let’s now look at the adjoining flat, 125, High Street which still has 83.83 years to run on it’s lease.

Property 125, High Street, Anytown
Valuation Date

11/03/2011

Lease Details
Date

25/12/1995

Term (years)

99

Expiry Date

24/12/2094

Unexpired Term

83.83

years

VALUES
Value following purchase of extension say

£200,000

Percentage relativity

98%

Current lease value

£197,980

Diminution in Value of Freeholder’s Interest
Term 1 RENT

£50

X YP

17.83

YEARS @

8%

9.3307

£467

Term 2 RENT

£100

X YP

33

YEARS @

8%

11.5139

deferred for

17.83

years

0.2535446

£292

Term 3 RENT

£200

X YP

33

YEARS @

8%

11.5139

deferred for

50.83

years

0.0200019

£46

£805

Reversion To share of freehold with vacant possession

£202,020

X PV

83.83

YEARS @

5%

0.0167379

£3,381

Total Diminution

£4,186

Calculation of Marriage Value
Having regard to the long unexpired lease term marriage value is disregarded.

£200,000

Reversion X PV 173.83 Years @

5%

0.0002073

£41

Aggregate value of interests after grant of new lease

£200,041

£197,980

£4,186

TOTAL

£4,186

In this case we can see that the amount that will have to be paid by the lessee to the freeholder is only made up of two elements:-

Loss of ground rent – £805

Loss of reversion – £3,381

As the lease still has more than 80 years to run the Leasehold Reform Act says that ‘marriage value’ is not applicable.

In the first case the total amount that the lessee would have to pay is £13,246. In the second case the total amount that the lessee will have to pay is £4,186.

The two flats as we have said are identical and we can, therefore, see why it is important to renew the lease whilst it still has more than 80 years to run.

In the next few posts we will look in a bit more detail at the formalities of the legislation, but hopefully, we have now given some insight into how the Leasehold Reform Act works in principle.

Should you require advice on extending your lease or enfranchising the Freehold of your property you can call us on 020 8360 7615.