Lease extension: 70yrs. unexpired, rent £30. Premium?

[pgood]

Hi all (sorry another long one)

I have used the site so far to understand the basics of calculating the premium for extending my lease. It has been very useful and given me the confidence to start the negotiations with the freeholder on an informal basis. However I would be grateful if anyone could verify my calculations and help answer a few of my questions. I have estimated the value of the lease extension as £8150 (see calculations below) but have a few concerns.

1) I calculated the premium based on a 90 year extension at pepercorn rent. However I am looking to sell the flat and would therefore prefer to keep the cost of the extension down by offering a shorter term (29yrs- back up to 99) and keeping the ground rent at £30pa. What difference is this likely to make to the premium and how can that be calculated?

2) If I am looking to negotiate informally am I better off just offering a slightly lower figure without getting into the minutia of the figures or going straight in with a well laid out offer?

3) Are my calculations correct and assumptions on the capitalisation of ground rent/reversion yields in line with the current market, if not how will I know what a valuer is likely to use?

4) School boy question but is there a difference between reversion yields and deferment rate - they seem to be used interchangably?

Premimum calculation
2nd floor flat in Stanmore (HA7)
Ground Rent £30
Flat value with long lease (estate agent val) £120000
Flat value with present lease (90% realativity) £108000
Un-expired term 70.37years

Yield rate on Ground Rent % 7%
Yield/deferment rate reversion % 5%

VALUATION OF PRESENT INTERESTS
FREEHOLDER
Present rent £30
YP for 70.37 years at 7% 14.26666 £428

Reversion to V.P. value £120000
Deferred 70.37 years at 5% 0.032278 £3873 + £428 = £4301

LESSEE £120000

CALCULATION OF MARRIAGE VALUE
Future values
Freeholder £0
Lessees £120000
Present values
Freeholder £4301
Lessees £108000 = £112301

Marriage Value £7699
50% attributable to Freeholder £3849

Other loss £0

Premium £8150

If you have stuck with it to the end then Thank You!

Paul

[sgclacy]

Yes, but only just

[WakeyWakey]

Keeping a £30 ground rent means that the freeholder now has the following future value to offset against his current value: -

£30 for 99 years @ 7%
30 x 14.268 = £428

£120,000 deferred for 99 years @ 5%
£120,000 x 0.0079847 = £958
Total £1,386

The resulting premium is then £7,460. £30 p.a. is hardly worth the landlord collecting so he will likely want a larger initial ground rent (say £200 p.a.) and some sort of regular increment to stop it becoming uneconomic again in the future. Or he may not be interested in maintaining a ground rent at all and just want the maximum capital value.

You could argue that the yield rate for your existing £30 p.a. should be higher as it is an unattractive investment hardly worth the hassle of collecting. Using 9% instead of 7% would save you a whole £50 on either premium!

Estate agent values may be more or less than actual values, of course. Recent sales of similar properties will also help.

Where did you get your relativity figure (I’ll leave the percentage in your hands)? If it is from a graph of leasehold value as a percentage of freehold value then you might take into account that the £120,000 value is probably for a leasehold flat with a full lease, not a freehold value. The freehold unencumbered by a lease is reckoned to be worth more to the landlord than a long lease is worth to the leaseholder alone - say 1% more. Your virtual freehold could therefore be worth £120,000 + 1% = £121,200 and relativity of 90% makes the present lease £109,100. This shaves a further £230 off of the lease price. If your relativity percentage is from another source then the virtual freehold argument may not apply.

Taking all of above into account (99-year lease, £200 ground rent doubling every 25 years, 9% yield on existing rent, virtual freehold of 1% more than long-lease price, everything else as you have stated) results in a premium of £5,278, potentially reducing your current capital outlay by £2,872.

I would advise making an offer for the lease and conditions you want but without the calculation. It may be accepted or challenged. If challenged, agree to exchange valuations. There is no obligation for either side to give a detailed breakdown.

You could use a professional and you could serve a statutory notice, even if you would prefer to keep negotiating outside of the Act in parallel. I mention this to keep professional members from upbraiding me. You seem to be doing OK so far.

[pgood]

Thanks for that, excellent advice

Can I assume from your response that my initial figures would have been at the high end for the valuation (assuming I was asking for 99yr extension at pepercorn rent) or would a valuer acting on behalf of the freeholder be likely to come in with a value much higher than I calculated?

And same question regarding your reworked valuation (based on extending to 99yrs with £200pa ground rent doubling every 25 years). Would you expect a valuer to come in much higher than the £5278 you have calculated, if so how much?

Thanks again