Loft spaces in London frequently need to be valued in a scenario where the leasehold owner of the top floor flat spots an opportunity to extend their property and approachs the freeholder with a view to purchasing the space.
The first thing to establish is whether you own the loft space, as in the majority of cases it will be the freeholder who has possession.
The second point to establish is whether the space could be sold on the open market or is only of use to the leaseholder of the adjacent demise. Points to consider are whether there would be a means of access if the space were to be developed as a separate dwelling and even if there was, is the development viable from a planning point of view? The cost of complying with Building Regulations may also make the cost of developing a new dwelling too expensive.
In most cases the development will only be viable as an extension to the top floor flat so that will be the focus of the remainder of this post.
The definition of ‘market value’ is as follows:
The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.
As there is only one potential purchaser in this scenario it will not be possible to properly market the roof space. We are therefore not looking to provide a market value.
The approach that we adopt is one of added value. The principle is the same as when a leaseholder pays compensation to their Landlord in return for granting an extension to the term of their lease. Once the existing term of the lease is added to the additional term which has been granted by the Landlord the property becomes more valuable. The term used is ‘marriage value’ and the Act covering lease extensions dictates that it is split equally between the parties.
When a leaseholder of a flat combines their demise with a roof space to form a larger property that larger property will be worth more than the combined value of the two separate spaces. There is no Act that requires the added value, or marriage value, to be split equally between the parties but it is considered to be the fairest method.
The methodology that I would adopt to establish the marriage value is therefore the estimated market value of the top floor leasehold flat following its extension in to the roof space minus the current market value of the existing top floor leasehold flat combined with the cost of the necessary work (and some possible other factors).
The cost of the work should include any alterations that are necessary to the communal areas or any of the other leasehold flats in the building and professional fees including the estimated costs of complying with the Party Wall etc. Act 1996.
In addition to this there are any number of other considerations that could be added, depending on the level of detail of your report or inclination of your surveyor. The most common is a risk deduction, followed by costs of finance. Lessee’s risk and profit is perhaps a controversial one but is representative of the fact that the leaseholder is shouldering all the risk in this development, whilst the freeholder is exposed to none. If the premium for the loft space is paid in advance of the works being completed (and it usually is), then the project has to run precisely to plan, time and cost for the valuation to be correct. The 10% downwards adjustment reflects the likelihood of the project coming in at more than would have been expected. Of course the chance of the build coming in under budget and the contactor offering a nice healthy discount are slim to none!
There is a lot of subjective opinion when it comes to valuations of this type, so it is not unusual for both the leaseholder and the freeholder to instruct their own separate surveyors and to have a period of negotiation. Other freeholders are more relaxed and are happy to commission only one surveyor and one report. In that instance it is preferable for the Valuer to clearly state in their T&Cs that both the leaseholder and freeholder are clients and that the report represents his impartial opinion and act as a single joint expert.
Peter Barry’s Chartered Surveyors have valued large numbers of loft spaces across London as well as other types of spaces including vaults and communal areas for development. If you are considering works of this nature please either email or call on 020 7183 2578, and we will be very happy to assist you.
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