Discrepancies between online lease extension premium calculators.

[jjgiddes]

Hello everyone.

We are in the process of trying the extend the lease on our flat. To get an idea of how much it would cost, I used some of the online lease extension calculators such as the one on www.lease-advice.org. These calculators came up with a range between £9000-£11000 for adding 90 years on. (The current lease has 78 years left, ground rent £100, and value of flat £250000).

However, when I try more 'sophisticated' calculators such as http://www.tenancy-agreements.co.uk/lease.php that let you enter the yield etc, they come out with significantly higher premiums. This is unless I enter yield values of 8% and above. Do the standard/simple calculators have a high built in yield value? Or is there some other reason for the discrepancy?

I ask because, following their valuation, the landlords have given us an offer of a 99 year lease with ground rent doubling every 25 years. But, this offer is 25% above what the calculators like the ones of lease-advise.org say they the premium should cost for adding 90 years with no ground rent.

Any advice on this would be much appreciated.

Cheers,
Jim

[jjgiddes]

... and to make matters more confusing, I've just done the calculation using the methods provided by SGCLACY on this forum and that brings the total out to about 7500, which is lower than the result that all the online calculators give. If anyone could shed any light on these discrepancies, that would be a great help.

Thanks,
Jim

[sgclacy]

There are three elements to teh valuation

1) Capitalisation of the ground rent.Assuming the ground rent is fixed at £100 per annum and using a rate of 7% this gives £1,400

2) Deferred value of the reversion. The flat is worth £250k and discounted back at 5% gives £5,600

3) Marriage value. This has been growing in the last few years and at 78 years the amount is around 5.5% or otherwise expressed as 94.5% . I derive my figures from a study by John D Wood. Therefore 5.5% of £250,000 = £13,750 less the capitalisation of the rent and less the value of the deferred value of the reversion you get £6,750 landlord claims 50% so £3,375

Therefore premium would be the sum of the three steps ie £10,375 plus of course the landlords valuation and legal costs. budget for a further £2,000 plus your own. For this you get a new 168 year lease with a peppercorn rent

Whether sum of the online calculators include the landlords cost I don't know The only really contentious point is relativity and even then the most that can move around by is a couple of percentage points giving a variation of about £1k to the total premium payable.

[jjgiddes]

Thanks! Yes, the growth in the marriage value explains why when I used your previous post from 2008, the figures came back lower.

I have one more question that it would great if you, or someone else, could help with.

In comparison to the premium that gets calculated for adding 90 years to a lease with a peppercorn rent, how do you then calculate what an appropriate discount is when offered a lease extension to 99 years with ground rent (and periodic ground rent increases)?

Thanks,
Jim

[sgclacy]

Take the statutory figure and deduct the value of the new ground rent income and then deduct a figure for the benefit to the landlord in granting a 99 year lease as opposed to a very long lease. However by going outside of the Act the Landlord cannot roll over the gain for CGT purposes and this would need to be factored into by the landlord

So in your case if the ground rent doubles every 25 years this is worth around 14.5 years purchase so £250 pa is worth around £3,600 to the landlord.


A 99 years lease is worth about £2,000 to the landlord as opposed to a 125 year lease when the flat has a value of around £250,000

As to what the tax benefit lost to the landlord in not going under the act you would be unable to calculate but say half the gain would be taxable and assume a tax rate of say 30% then the landlord would lose £10,375 X 50% X 30% = £1,550

Therefore is the landlord was to offer a new 99 year lease with a ground rent of £250 doubling every 25 years then a reasonable premium should be of the order of £6,300