Lease extension- 76yrs. unexpired, £125 (rising) ground rent

[dekkerz]

Hi

Does anyone know how much more I could expect to pay on a lease extension if I delayed the lease extention by 2 years? I currently have 76 years remaining.

The property is worth about 345,000. The ground rent payable is
£125 for the first 25 years
£225 for the second 25 years
£350 for the third 25 years
£500 for the remainder of the lease

Thanks
Dereck

[WakeyWakey]

Assuming property prices are the same in 2 years your lease would cost £600 - £700 more. However, if the flat were to drop in value by 20% in two years the cost of a new lease could be £2,500 - £3,000 less than today. Unless the rules on rates were to change again before then...

[dekkerz]

Hi Wakey

I was under the impression that the cost of extending the lease is based among other things on the current market value before lease extension and then after lease extension .. say in my case 350,000 before and then 370,000 after... if they market were to drop considerably wouldnt the same be true.. say 250,000 before and 270,000 after? or am I missing something?

Thanks
Dereck

[WakeyWakey]

You are correct that the before and after values are used in the calculation. This is termed "relativity" and is commonly calculated using a percentage from graphs, although evidence of actual transactions for similar properties in the locality can be more compelling. The difference between before and after values would therefore be less for a cheaper property i.e. using your examples the 270,000 figure for full lease would reduce to 255,000 if the 94.5% relativity you implied in your first example was judged to be correct.

I was trying to point out that it is not possible for anyone to answer your original question. The last two years brought us Sportelli (5% deferment rate on flats) and a 20% rise in flat prices (in my area). Both of these unpredictable factors combined had a far greater effect on new lease prices than a two year reduction in the remaining term of a lease. Nobody knows what the next two years will bring.

[dekkerz]

Hi Wakey

Thanks for the clarification, I gather that from what you are saying I would be better off waiting a year to see what happens with property prices in my area as the cost in a year or two is likely to be small in the grander scheme of things.

I doubt very much if the relativity value I quoted was correct in the first place as I was just trying to understand the workings behind the calculating the value of the lease extension.

Can you recommend any websites where I can get a better estimate on the currently relativity value?

Thanks again for you help much appreciated!

Dereck

[WakeyWakey]

www.lease-advice.org/relativity.htm charts actual relaivities based on LVT decisions. You will see that the spread of values for 74 years is + or minus 3% fr recent decisions, + or - 5% for all decisions up to 2007.

You may have more to gain by waiting a year if house prices were to fall. A £14,000 fall (say 4% fall) over the next two years would cancel out the £600 increase in the price of your new lease granted under the Act. But you would save 2 x £225 = £450 ground rent if you took the lease out now.

Generally, I would never advise that a lessee delays extending a short (<80 years) lease. House prices may not fall for long and other unforeseen factors may change. It may even take a lot longer to conclude a new lease than you expect, which could lose you buyers.

[dekkerz]

Hi Wakey

I'm not intending to sell at least not in the short term but I understand as you say you never now whats round the corner.

I would really like to sort it out now but I don't really have an idea on how the extension will cost me I got in touch with a local solicitor and the legal and surveyancy costs alone were enough to scare me.

I've also have a look at some of the other posts but I'm not sure how to get to the deferred value of the reversion

Thanks for the support

[dekkerz]

I've been looking at the calculation again.. and I think I understand it better now..

so in my sake if I were to say that my flat would be worth 365,000 with an extended lease the Deferred value of the reversion @ 5% over 76 years would be about 8,951.71.. is this correct?

[sgclacy]

I've been looking at the calculation again.. and I think I understand it better now..

so in my sake if I were to say that my flat would be worth 365,000 with an extended lease the Deferred value of the reversion @ 5% over 76 years would be about 8,951.71.. is this correct?

You are correct.

Out of interest the calculation can be done in Microsoft Excel as

=round(365000/round(1.05^76,5),5)


For the curious the 5 represents the number of decimal places

[sgclacy]

Hi

Does anyone know how much more I could expect to pay on a lease extension if I delayed the lease extention by 2 years? I currently have 76 years remaining.

The property is worth about 345,000. The ground rent payable is
£125 for the first 25 years
£225 for the second 25 years
£350 for the third 25 years
£500 for the remainder of the lease

Thanks
Dereck

This is made up of THREE ELEMENTS. Capitalisation of the Ground Rent, The deferred value of the reversion and a 50% share of the marriage value


1) The capitalisation of the ground rent is done as follows:-

Firstly we have the following:-

2 years left at £125.00

25 years at £225.00

25 years at £350.00

24 years at £500.00

This can be looked at as FOUR streams of income of which will be delayed :-

A) Present Value (PV) of £125 for 2 years

B) Present Value (PV) of £225 for 25 years deferred for 2 years

C) Present Value (PV) of £350 for 25 years deferred for 27 years (i.e. (2 + 25))

D) Present Value (PV) of £500 for 24 years deferred for 52 years (i.e. (2 + 25 + 25))

Assuming you have access to Microsoft Excel the formula would be, assuming we capitalise at 7.25%

=PV(Int rate,years,amount)

therefore input

A) =PV(0.0725,2,125) which should return £225.22


B) = PV(0.0725,25,225) which should return £2,564.05 however this needs to be deferred for 2 years so the formula is now

=PV(0.0725,25,225)/(1.0725^2) = £2,229.11


C) = PV(0.0725,25,350) which should return £3,988.52 however this needs to be deferred for 27 years so the formula is now

=PV(0.0725,25,350)/(1.0725^27) = £602.68


D) = PV(0.0725,25,500) which should return £5,697.89 however this needs to be deferred for 52 years so the formula is now

=PV(0.0725,24,500)/(1.0725^52) = £147.36

The total of these four streams is £3,204

2) Deferred value of the reversion. At 5% discount rate

£345,000 deferred back over 76 years at 5% =

=ROUND(345000/(1.05^76),2) = £8,461

3) Marriage Value at 76 years I am assuming 96% relativity and landlord claims the statutory 50% of this. Therefore

£345,000 X (100% less 96%) = £13,800 less £3,204 less £8,461 = £2,135
50% of £2,135 = £1,068

Premium payable for a 90 year extension with a peppercorn rent = £3,204+8461+1068 = £12,733

IN TWO YEARS TIME THE CALCULATION WOULD BE

1) The capitalisation of the ground rent is done as follows:-

Firstly we have the following:-

0 years left at £125.00

25 years at £225.00

25 years at £350.00

24 years at £500.00

This can be looked at as FOUR streams of income of which will be delayed :-

A) Present Value (PV) of £125 for 0 years

B) Present Value (PV) of £225 for 25 years deferred for 0 years

C) Present Value (PV) of £350 for 25 years deferred for 25 years (i.e. (0 + 25))

D) Present Value (PV) of £500 for 24 years deferred for 50 years (i.e. (0 + 25 + 25))

Assuming you have access to Microsoft Excel the formula would be, assuming we capitalise at 7.25%

=PV(Int rate,years,amount)

therefore input

A) =PV(0.0725,0,125) which should return £0


B) = PV(0.0725,25,225) which should return £2,564.05 however this needs to be deferred for 0 years so the formula is now

=PV(0.0725,25,225)/(1.0725^0) = £2,564.05


C) = PV(0.0725,25,350) which should return £3,988.52 however this needs to be deferred for 25 years so the formula is now

=PV(0.0725,25,350)/(1.0725^25) = £693.23


D) = PV(0.0725,25,500) which should return £5,697.89 however this needs to be deferred for 50 years so the formula is now

=PV(0.0725,24,500)/(1.0725^50) = £172.13

The total of these four streams is £3,429

2) Deferred value of the reversion. At 5% discount rate

£345,000 deferred back over 74 years at 5% =

=ROUND(345000/(1.05^74),2) = £9,328

3) Marriage Value at 74 years I am assuming 94% relativity and landlord claims the statutory 50% of this. Therefore

£345,000 X (100% less 94%) = £20,700 less £3,429 less £9,328 = £7,943
50% of £7943 = £3,971

Premium payable for a 90 year extension in TWO YEARS TIME with a peppercorn rent = £3,429+9,328+3,971 = £16,728

Therefore in TWO YEARS TIME the cost will have risen by £3,995 (i.e. £16,728 less £12,733) and you would have paid £125 for two years (£250) total £4,245 negated by the interest you might have received on you £12,733 say £1500 (i.e. £12,733 at say 6% for 2 years). Producing a net increase in cost of £2,745 Assuming in this example that property prices remain static for two years (possibly an optimistic assumption)

I wont show the working but if prices fell by 10% over two year the cost of the lease ext would be £15,227 a rise of £2,494. and you would have paid £125 for two years (ie £250) total negated by the interest you might have received on you £12,733 say £1500 (i.e. £12,733 at say 6% for 2 years). Producing a net increase in cost of £1,244

I wont show the working but if prices fell by 20% over two year the cost of the lease ext would be £13,725 a rise of £992 and you would have paid £125 for two years (ie £250) total negated by the interest you might have received on you £12,733 say £1500 (i.e. £12,733 at say 6% for 2 years). Producing a saving in cost of £258

Conclusion: If you are of the opinion prices will fall by 15% plus over the next two years there would appear little point in doing it. However if you may sell it would be advisable to have the lease extension already done before selling and thus avoid uncertainty in a purchasers mind.

[WakeyWakey]

Marriage Value at 76 years I am assuming 96% relativity... Marriage Value at 74 years I am assuming 94% relativity

Would relativity drop by 2% over two years?

[sgclacy]

In the range of 80 years to 65 years it is wroughly 1% for every year below 80 subject to a minimum of 3%

Therefore at 79,78,77 it is around 97% and at 74 it is around 94% ie 6 years off

If you look at the graph of graph that line fits reasonably well and as a crude rule of thumb is good enough for these sought of approximate valuations

At an LVT hearing it can move depending on the qulaity of those putting forward the arguments. I know you feel the 1992 Savills graph should be used and its logic is compelling but at the moment it is not accepted by the LVT

[sgclacy]

Hi Wakey

Thanks for the clarification, I gather that from what you are saying I would be better off waiting a year to see what happens with property prices in my area as the cost in a year or two is likely to be small in the grander scheme of things.

I doubt very much if the relativity value I quoted was correct in the first place as I was just trying to understand the workings behind the calculating the value of the lease extension.

Can you recommend any websites where I can get a better estimate on the currently relativity value?

Thanks again for you help much appreciated!
Dereck

Relativity is a rather esoteric argument. The values have to be arrived at in a world where the Act does not exist. The “No Act World” . As we live in an Act world buyers will pay better prices for a short leases property because they know they have the right to extend. Therefore from your observations you have seen that relativity may not be a great as those determined by the LVT.

There was a study done by Savills in 1992 and some believe this should be used because in 1992 the 1993 Act was not in force although it was expected. Therefore the relativities shown should be more accurate. From a landlords perspective the differentials are much greater and increase the cost of a lease extension.

The LVT have not used that study in arriving at their figures for relativity

[WakeyWakey]

I know you feel the 1992 Savills graph should be used and its logic is compelling but at the moment it is not accepted by the LVT


No, I've never mentioned or used the Savills graph in relation to any of our freeholds - you are perhaps thinking of another contributor. I wanted to give the poster what he/she asked for and to show the published LVT data demonstating how much of a variation there can be in their decisions on relativity (+ or - 5%).

I find it interesting that you propose a 31% increase (£12,700 to £16,700) in the cost of a new lease solely as a result of the unexpired term reducing from 76 to 74 years. Such an increase would certainly support the argument that a lessee should never delay in seeking to replace a short lease.

[sgclacy]

I find it interesting that you propose a 31% increase (£12,700 to £16,700) in the cost of a new lease solely as a result of the unexpired term reducing from 76 to 74 years. Such an increase would certainly support the argument that a lessee should never delay in seeking to replace a short lease.


And that is on the basis that property prices remain static!

If prices rose by say 5% per annum for two years (very unlikely at the moment) the premium would be £18,230 - 44%

A side comment is that relativity is not important in the range of 79 to 77 years as the effect of Cadogan and Sportelli results in no marriage value being created. In the example I have given only a small amount appears at 76 years and the growth from 76 to 75 in marriage value is the root of the large jump referred to above, however as time passes the growth does slow down.

I have done the calculation at 76 years - £12,732 assuming relativity of 96% and at 75 years - £14,773 assuming a relativity of 95% this gives a growth of £2,041 a growth of 16%

At 70 years the premium would be £24,685 relativity 90% and at 69 years £26,709 a growth of £2,024 or 8.2 %

For the curious the explanation is as follows :-

The three factors that make up the premium are all growing:-

Ground rent capitalisation figure is growing by 7.25%

The deferred value is growing each year by 5%

The marriage value is growing but the rate of increase is slowing:-
In years 76 the marriage value is 4% and in year 75 it is 5% a growth of 25%
In years 70 the marriage value is 10% and in year 69 it is 11% a growth of 10%

Therefore in the two years 76-75 we are reviewing the following broadly happens:-

• Ground rent capitalisation grows by 7.25%
• Deferred value grows by 5% per annum
• The marriage value grows by 25% (see para above)

Now depending on their weighting you can begin to see that an overall figure of 16% can be explained

Therefore in the two years 70-69 we are reviewing the following broadly happens:-

• Ground rent capitalisation grows by 7.25% per annum
• Deferred value grows by 5% per annum
• The marriage value grows by 10%

Now depending on their weighting you can begin to see that a figure of 8.2% can be explained

So going back to your comment a lessee would be strongly advised to extend the lease once it is in the very late seventies however the rate of increase does slow down as the lease gets shorter. The advise would be even stronger in a rising market. In a falling market it could be advisable to hang on to your capital if you are confident that you will not be moving .

Bear in mind many freeholder may well want to a deal below the figures thrown up under the Act as cash in a recession is a very useful thing!

[dekkerz]

Hi Sgclacy

Thank you very much for your input.

I think you are helping me in making the right decision I was always expecting to pay +- 15,000 for the extension what really shocked me was the legal and surveyor fees, including the freeholders legal fees this amounts to just over £7,000.

I have seen on some of your other posts that you support the charity "Children in Need" can you please send me the forwarding address and I will gadly post you a cheque.

Thanks
Dereck

[sgclacy]

Thank you will do.

Can you post on the forum the breakdown of your £7k legal and surveying costs.

Only certain elements if you apply under the Act would you be liable. The figure surprises me

Kind regards

[dekkerz]

Thank you will do.

Can you post on the forum the breakdown of your £7k legal and surveying costs.

Only certain elements if you apply under the Act would you be liable. The figure surprises me

Kind regards

Hi

This is what I was quoted, I called a surveyor in my area and they were charing even more, all prices below are inclusive of VAT


Valuation 646.25
Valuation Accepted additional Charge by person
arrying out valuation 1,057.50
Serving of Section 42 Notice 998.75
Completion of Lease Extension 2,350.00
Land Registry Fee + Other 352.50
Freeholder's Legal Fees 1,762.50

Total Costs 7,167.50

[jeffrey]

The third/fourth elements seem too high.
Serving Notice and acting for T on new lease should not cost nearly £3350; I'd guess that £1000 ought to cover both.

[sgclacy]

Hi

This is what I was quoted, I called a surveyor in my area and they were charing even more, all prices below are inclusive of VAT


Valuation 646.25
Valuation Accepted additional Charge by person
arrying out valuation 1,057.50
Serving of Section 42 Notice 998.75
Completion of Lease Extension 2,350.00
Land Registry Fee + Other 352.50
Freeholder's Legal Fees 1,762.50

Total Costs 7,167.50

The valuation fee should be of the order of £400- £500 plus VAT. You will have to pay the landlords so in total about £1000 plus VAT

Serving a section 42 Notice. Your solicitor needs to confirm that you have owned the flat for 2 years and have a pulse! to draft a word processed document for £850 plus VAT is obsence

You may then have to pay the landlords costs of checking the validity of the notice I believe in the cases that have gone to the LVT a fee of around £250 for this has been accepted

The landlord prepares the deed of surrender and re-grant and the LVT have agreed that £600 plus VAT would be acceptable.

Your solicitor has to check and of course deal with getting a deed of substituted security I find the proposed estimated cost £2000 plus VAT breathtaking

Send me a PM and I will send you details of a solicitor who will do it for a lot less