Valuation for Leasehold Extension
An outline of the valuation principles to determine the price for extending a lease of a flat under the Leasehold Reform Housing and Urban Development Act 1993.
By Angela Alexiou, Solicitor at Bolt Burdon and Ibraheem Dulmeer, Legal Adviser with The Leasehold Advisory Service
The process of leasehold enfranchisement provides a flat owner with the opportunity to extend the term of their lease. The legislation has been introduced to balance the bargaining power between the Freeholder and the leaseholder. Historically, and prior to the leasehold reform, Freeholders could demand an extortionate premium or refuse a lease extension carte blanche. There was no protection for a leaseholder to negotiate upon the terms or premium of their lease extension.
The Leasehold Reform Urban and Housing Development Act 1993 (“the Act”) provides a qualifying flat ownerwith a 90 year top up to their existing term and extinguishes the ground rent.
Leaseholds are a depreciating asset and extending one’s lease should be viewed as protecting an investment. Many leaseholders are unaware of the importance of extending a lease term which has an unexpired term approaching 80 years, or the cost implications of allowing the unexpired term to fall below 80 years.
Best practice indicates that it would be for a leaseholder to proceed with a statutory lease extension, and to ensure a notice under the Act is served prior to the unexpired term falling below 80 years. The lower the lease term coupled with the increase in the property value can result in a high premium being payable to extend a term by a further 90 years and to extinguish the ground rent.
Informal lease extensions could be considered carefully and may offer a commercially sensible solution to a particular leaseholder.
Nevertheless, it is prudent to start a lease extension process by utilising the statutory procedure, assuming the leaseholder qualifies. The reason being the service of the Notice under the Act freezes the valuation date and is known as the relevant date. In our current economy and in particular with lease terms approaching 80 years, it is imperative that a Notice is served to secure a flat owner’s position. The service of the Notice affords a flat owner with a greater degree of bargaining power.
Angela sets out a scenario with which she has recently dealt:
“I have a client who has an unexpired term of 70 years. My client wishes to extend the lease with a view to disposing of the property. With the current lease term my client is restricted to cash buyers as many lenders will not lend when the unexpired lease term is lower than 74 years. I proceed to serve a Notice and after two months the Freeholder served a counter notice. Separately the Freeholder has offered an informal lease extension for a substantially lower premium, however has attached a rising ground rent. Upon receipt of this informal offer I explain the terms to my client and also suggest that we could potentially re-negotiate on more favorable terms. For certain leaseholders these informal deals and the ability to negotiate can be beneficial as the leaseholder may ultimately pay a lower premium. Provided the rising ground rent is not aggressive and the acceptance of these terms would not affect the future marketability of the property these informal extensions can be beneficial. The uplift, the ground rent and any modifications to the lease can be negotiated informally.”
To conclude, it is prudent to protect your investment by extending your leasehold term. A flat owner may wish to start the process using the statutory procedure. However in circumstances where the Freeholder makes an informal offer, these offers should be carefully explained to a flat owner and where possible negotiated and considered, to achieve the best commercial outcome.
The key is choice. This choice must be an informed choice, with legal advice being taken.