Leasehold Extension

Factors Affecting Leasehold Extension Valuation

  1. The Ground Rent
  2. The Years Remaining On Your Lease
  3. The Value of Your Property
  4. The Area in Which Your Property is Located

The Ground Rent

  • Ground rent is a fee you have to pay to your Freeholder under your lease. It is usually a small amount, such as £100 or £200 a year.
  • After Lease Extension only peppercorn ground rent will be payable. This essentially means that your lease will become rent free. You must therefore compensate the Freeholder for the loss of the ground rent they would have received if you had not extended your lease. In order to do this the future ground rent owed to the Freeholder is amalgamated into a lump sum constituting part of the cost of the Lease Extension.
  • In 70-80 years time, a ground rent payment of £100 will be worth much less in real terms due to general inflation. Future ground rent is hence discounted using a percentage value known as the 'Yield Rate'. The Yield Rate is determined principally by the area in which you live although recent court cases have had an impact on the overall levels of yield rates.

The Years Remaining On Your Lease

  • The remaining length of your lease impacts the valuation in several ways:

(1) The Ground Rent

  • The Freeholder must be compensated for the loss of future ground rent for each year remaining on the lease.

(2) The Freehold Reversion

  • At the end of your lease, ownership of your property reverts to the Freeholder. Once you have extended your lease this will be delayed by a further 90 years. The Freeholder must be compensated for this delay.
  • If your lease has only a few years remaining, the value of the reversion will be higher. This is because the Freeholder expects to receive the property in the near future and must hence be compensated at a higher level for its loss.
  • Banks and Building Societies may not provide mortgages on properties with leases of less than 70 years. This is because the value of the Freehold Reversion increases substantially with time and the property is less of a secure asset for the banks to loan against.

(3) Marriage Value

  • Once your lease has less than 80 years remaining, the increase in the value of your property caused by extending the lease must be shared 50:50 with the current freehold owner. This charge is known as 'Marriage Value'.

The Value of Your Property

  • The value of your property will increase once you have extended your lease. This improved value of your property is used to calculate the Freehold Reversion discussed above. Hence, if your property has a high current value, you will pay more to extend your lease.

The Area in Which Your Property is Located

  • The amalgamated ground rent payable to your Freeholder on extension of your lease is partially determined by where you live.
  • If you live in prime, central London you will pay more than if you live in a commuter suburb. This is because rents from prime properties are considered more valuable and reliable than those from less exclusive properties.
  • The value of the Freehold Reversion is also determined in part by where you live. However, recent court cases have made a clear distinction between prime, central London and the rest of the UK.