lease extension

[Simone]

I would like to ask how much I would have to pay to extend my current 63 year lease. The freeholders are the management company of our block of six flats and they have not been forthcoming and don't answer my letters. The current ground rent is about £38 per year and last year's service charges were roughly £200 per flat. Thanks in advance for any assistance.

[sgclacy]

You need to post some more information:-

Ground rent and if it rises then by how much and when

The value of the flat assuming it had a long lease and a neglible ground rent

The start date of the term

[Simone]

ground rent is £38 per year and doesn't change. The value of the flat is £245,000 which is what a flat was sold for two months ago with 200 year lease and I believe £75 a year ground rent. My Lease was granted in 1972 for 99 years.

[sgclacy]

The value of the lease ext would be of the order of £24,302 made up of three elements:-

1) Capitalisation of the rent £38 for 63 years at 7.25% is approx

£38/0.0725 = £524

2) Value of the reversion, Flat worth £245k with long lease and neglible ground rent. This discounted back at 5% gives £245k/ (1.05^63) = £11,330

3) Marriage value. Based on LVT cases that have been decided (I am aware of an argument put forward that Savills research in 1992 should be used it is an interesting argument but not supported by the LVT) relativity would be of the order of 85%

£245k X (100% - 85%) = £36,750 less £524 less £11,330 = £24,896 take 50% = £12,448
Premium for a 90 year extension with a peppercorn rent would be the sum of all three steps = £524 + £11,330 + £12,448 = £24,302
Plus your own legal and valuers fee plus the landlords valuers fee plus certain aspects of their legal costs budget for £1,750

[Simone]

Thank you so much for your reply. I am really puzzled now. Two years ago the previous freeholders offered us 6 Lessees the right of first refusal at £18,000 with two flats, including mine, having the short leases and the other 4 with long leases. It's a long story as to what went wrong, but having paid my share, based on £7,500 for the 2 short leased flats, and £600 that we all paid (only 5 took up the offer), which totalled the £18,000 asking price, I have not ended up with a share of the freehold and no lease extension. How was it possible to have sold the freehold reversion for such a low price if the previous freeholder could have got over £20,000 for my lease extension alone? I'd be very happy to see your comments!!!

[sgclacy]

Thank you so much for your reply. I am really puzzled now. Two years ago the previous freeholders offered us 6 Lessees the right of first refusal at £18,000 with two flats, including mine, having the short leases and the other 4 with long leases. It's a long story as to what went wrong, but having paid my share, based on £7,500 for the 2 short leased flats, and £600 that we all paid (only 5 took up the offer), which totalled the £18,000 asking price, I have not ended up with a share of the freehold and no lease extension. How was it possible to have sold the freehold reversion for such a low price if the previous freeholder could have got over £20,000 for my lease extension alone? I'd be very happy to see your comments!!!

Unfortunatly a number of factors have worked against you during that period:-

Cadogan and Sportelli in 2006 has resulted in the dicount rate used to value the reversion being lowered to 5%

Property prices have risen in the last two years

The term has got shorter by two years


However there is a difference between market value and the price you pay under the Act if you want a lease ext. He offered you the freehold as he wanted to selland offered it at its market value. When you apply under the Act you do not buy at the market value for the freehold but at a price arrived at by formula.

Putting it another way, as an investor I would buy at a figure below what you would pay under the Act because I have to factor in the possibilty that you may not apply for a lease extentsion for many years.