Lease- 78 yrs. unexpired- extension cost?

[jbarns]

I have a first floor flat based in Romford which has a 78 years left on the lease. I am using the calculator below to work out what I may be looking at paying. My flat is currently worth approx. £159995 can someone tell me what I will be looking at the property being worth with lease extension,?Probably nothing as far as the estate agents are concerned but I assume there is some calcualtion for this.

http://www.tenancy-agreements.co.uk/lease.php

The Freeholders are the occupants of the flat downstairs, they are a young couple that could move out soon. I would like to talk to them informaly, does this mean that if I contact them in writing it becomes formal?

Lastly I have noticed from my re-mortage a couple of years ago that the Freeholders have never been updated at the land registry, could I use this in any way or am I just clutching straws?

[Psammead]

What do you currently pay as ground rent, and how is that set to rise in the terms of your lease? That will help me answer your first question, and give you a more accurate indication of how much a lease extension should cost.

If you write to them, it's still 'informal'. Only if you commission a solicitor to serve a Notice against them does it become formal.

[jbarns]

The ground rent is £30 per year rising to £100 a year, the land registry form I have does not say when it increases and in what increments.

[Psammead]

I estimate a lease extension will cost you about £7,300, with an increase of about £10,000 in value to your flat. After you've paid your fees (your own legal and valuer's, and your freeholder's), you'll probably just about break even. Definitely worth doing though!

This is based on:

1. Ground rent compensation:
£650.

2. Reversion (using 94% relativity):
Current value of flat at £160,000 with long lease value of £170,200. At 5% this makes the reversion about £3,785.

3. Marriage value:
£170,200 - £160,000 = £10,200.
Minus reversion and ground rent = £5,765.
Freeholder's 50% share of marriage value = £2,882.50

1. plus 2. plus 3. = £7,317.50.

Hope that helps!

[jbarns]

That's crazy 10K with costs for nothing in effect. I have has the flat up for sale for nearly a month and had a buyer pull out with an on offer on the table for £157000, there's no way anyway will pay £167000 just because it has a longer lease.

I would feel better if I was buying half the freehold but it is a purpose built maisonette with only two flats in the block, even if they moved out and sold the lease they wouldn't be obliged to sell to me.

What about the land registry, is it irrelevant whether they have registered?

[sgclacy]

My thoughts on its value would be as follows:

Ground rent Capitalisation at 7.25% = £550 (assume that the rent goes 30/60/100 in 33 yr steps)

The value of the reversion. The market has probably knocked £5k off the price so in theory you’re flat with a long lease and a peppercorn would be worth around £165k. If you discount this back at 5% over 78 years you get = £3642

So far all very similar to Psammead, however I take a different view on the relativity he has suggested 94%. I believe it is around 97%. This would have the following effect if I am correct:-


Value with long lease £165k its deemed value applying that relativity is £160.5
a difference of £4.5k. Take away the value of the ground rent and the reversion and you get £4500 less £550 less £3642 = £308 take 50% to arrive at £154

Therefore in my view the cost of the lease extension would be of the order of £550+£3642+£154 = £4346

A couple of points to note.

As a result of Cadogan and Sportilli the consequence of a lease dropping below 80 years is not that significant, if at all. As this example shows only £154 of marriage value is created at 78 years. This arises because the discounted value of the reversion (i.e. step 2) has increased asa result of that case and eats away at most of the differential between a long lease and a lease of around 77 years plus.

Secondly in calculating relativity you would have thought market values of flats with 78 years compared to ones with 999 years would give you the differential you need to calculate marriage value. Unfortunately it does not work like that. You have to assume that the differential is calculated in the "no act world". As we live in an "Act world" the values are ignored and the discussion become rather esoterically. Some believe that a useful graph to use would be the one calculated by Savills in 1992 (before the Act came into effect ) and shows what the differential should be. This unfortunately from a Landlords perspective has not been accepted by the LVT and they seem to be happy with Beckett and Kays graphs where factual evidence cannot be found to support differentials. Beckett and Kays Graph suggests that the relativity at 78 years is around 97 %. My personal rule of thumb for leases (in London) down to about 67 years is 1% off for every year below 80 subject to a minimum of 3%.

The fact teh Landlord is not registered at the Land Registry does not give you any advantage in this matter provided there is in existence a valid transfer form. Jeffrey will of course be able to confirm this point

[jeffrey]

Yes to final point in post #6. HMLR simply registers ownership, and has no involvement in enforcement of rights.

As to post #3, the HMLR form is probably headed "Transfer of Whole" (form TR1 or form 19)- transfer of leasehold interest- so it is the Lease itself that sets out the rent/covenants/etc.

[jeffrey]

That's crazy 10K with costs for nothing in effect.
Not so. Paying the premium/legal fees:
a. adds 90 years to unexpired leasehold term; and
b. deletes ground rent.

[WizWard]

The 7.25% capitalisation rate is unrealistically optimistic.

The 1992 plot on the B&K graph of Graphs shows 88% at 78 years.

jbarns' confusion arises in part from the fact that buyers of leasehold property overpay for the leasehold interest. The freehold interest, however, is probably priced correctly. Estate agents and ill-informed valuers contribute to the lease over-valuation bid process resulting in buyers subsequent dismay.

However, they may wish to consult their solicitors with regard to any possible remedy for their overpayment based on incorrect advice. Don't blame the lessor.

[sgclacy]

The 1992 plot on the B&K graph of Graphs shows 88% at 78 years.



There have been well over 1000 LVT cases can you highlight those where 88% is used for leases just below 80 years.

The average of all recent LVT cases supports a figure of around 97% for 78 years.

Use of the 1992 Savills graph would be excellent news for Landlords but the decisions of the LVT do not support its logic however compelling the evidence is to you.

I assume that some of the cases where you are the Landlord, where you are involved in agreeing terms for lease extensions, will envitably arrive at the LVT and it will be interesting to see your arguments put forward in more detail as they will be reported and in the public domain.

I can support my ESTIMATES upon the basis of LVT decisions and on my experience as a Landlord and I do several lease extentsions a month at present. I therefore find your strongly assertive comments that I am misleading people irritating. You feel that my relativity rates are inaccurate and should use Savills 1992 graph. The average of all LVT decisions shows rates far higher than Savills 1992 graph…..so why am I wrong in my estimates not to use Savills 1992 graph.

[WizWard]

The LVT's former decisions on deferment rate were significantly modified following rational analysis which was applied following extensive and costly cases re Arbib and then Sportelli at the Lands Tribunal and then at the Court of Appeal (re Sportelli). Many lessees feel they overpaid for their leases based on valuations arising from former LVT decisions rather than evidence.

I, and I think you, agree that the LVT relativity logic is unsound and may/should be challenged. If this happens then there will be many lessees who will have overpaid based on perpetuated LVT decisions rather than on hard evidence.

[sgclacy]

The LVT's former decisions on deferment rate were significantly modified following rational analysis which was applied following extensive and costly cases re Arbib and then Sportelli at the Lands Tribunal and then at the Court of Appeal (re Sportelli). Many lessees feel they overpaid for their leases based on valuations arising from former LVT decisions rather than evidence.

I, and I think you, agree that the LVT relativity logic is unsound and may/should be challenged. If this happens then there will be many lessees who will have overpaid based on perpetuated LVT decisions rather than on hard evidence.

It would seem a logical progression for the large estate owners to turn their attention now to relativity. I suspect they chose to focus on one key issue at a time.

I agree with you that the logic for the 1992 Savills graph is very powerful indeed; the last days of the "No Act World". I find it bizarre that surveyors at current LVT hearing produce a large body of evidential comparatives fine tuned to the effects of double glazing, central heating, and modified kitchens. They then adjust for the effects of the “no act world” by applying a rather arbitrary factor.

It is rather like producing a precision made horse shoe to a mirror finish and then whacking it on with some old nails and a club hammer