Lease- 73 yrs. unexpired- cost of extension term?

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    Lease- 73 yrs. unexpired- cost of extension term?

    I am negotiating with the landlord’s surveyor for a 90 year lease extension on a flat in W10, which has 73.13 years to run.

    We both agree it has an unimproved market value with a long lease of £272,000 as of April 2008. We fall out as regards the marriage value of the flat. The surveyor claims that the value of the existing lease is £240,720, i.e. a relativity of 88.5%, all without any justification, although he then goes on to say he is prepared to round it up to 89%. He doesn’t agree with the use of the Beckett and Kay relativity graphs.

    My question is how does one calculate the present value of the flat? With the market as it is there are effectively no comparators to attempt a “No act world” calculation. The asking price was around £260,000 as valued by two separate estate agents. We paid £250,000, partly for stamp duty considerations and partly accepting that we would have to spend a few thousands to bring it back into a habitable, “unimproved” condition (there was no hot water, etc).

    A subsidiary question is that the surveyor has used a value that he calls the virtual freehold value of £274,720 (long lease value + 1%) to calculate the reversion, which inflates the premium. We are not buying into the freehold! Is this justifiable?

    Many thanks for advice

    #2
    Hi Ian,

    In your question you state that you both agree on an
    unimproved market value with a long lease of £272,000 as of April 2008.
    You then say
    The surveyor claims that the value of the existing lease is £240,720.
    Can you just clarify: Did you serve a s.42 in April or are you negotiating this out of the act? I ask this because if you agreed a price of £272,000 in April and it was out of the act then there is no way the property will be worth that now. If, on the other hand, it was in the act then I am assuming the figure of £240,720 is from April as well? If it is not in the act then I would serve a s.42 now!!

    When he states that he doesn't agree with the use of the Beckett and Kay relativity graphs you should politely tell him that many surveyors do rely on these graphs (my one did) as well as the LTV panel - someone on here recently mentioned an example case where the panel accepted the difference between LVT decisions and the Moss Kaye line on the graph.

    Using that example as a guide I make your relativity somewhere between 92% - 94%. This means I value the existing lease around £250K - £255K. Much nearer to the figures you have quoted.

    The surveyors inability to justify his figures to you (?) is not something he would get away with in front of the LVT panel - and he know that - so I would move your negotiations in that direction.

    Hope this helps.

    Comment


      #3
      Thanks,

      £272,000 is the agreed, estimated value of the property with an extended lease, based on the date when Section 42 was served in April 2008. This is based on the value of similar flats with long leases in the same block.

      Where the surveyor came up with ~ £240,720 as the value of the flat with the existing 73.13 year lease also on that date, I don’t know. I doubt there are any sensible comparators. The lower the existing lease value the higher will be the marriage value.

      He also came up with 6% for the capitalisation value of the ground rent, compared to my 7%, which I based on other properties in the area. I doubt anyone would pay much to buy a ground rent of just £150 pa in 2081!

      Does anyone know the meaning of virtual freehold? I thought this applied when one was extending the lease AND buying into the freehold.

      Comment


        #4
        Originally posted by Ian_R View Post
        Does anyone know the meaning of virtual freehold? I thought this applied when one was extending the lease AND buying into the freehold.
        The expression 'virtal freehold' is a nonsense. It was invented by Estate Agents as a description of a very long leasehold (e.g. 999 yrs.) at a minimal ground rent (e.g. £5 per year), perhaps to soothe prospective purchasers nervous about buying anything less than a freehold estate.
        JEFFREY SHAW, solicitor [and Topic Expert], Nether Edge Law*
        1. Public advice is believed accurate, but I accept no legal responsibility except to direct-paying private clients.
        2. Telephone advice: see http://www.landlordzone.co.uk/forums/showthread.php?t=34638.
        3. For paid advice about conveyancing/leaseholds/L&T, contact me* and become a private client.
        4. *- Contact info: click on my name (blue-highlight link).

        Comment


          #5
          Jeffrey, thanks for your advice on “virtual freehold”.

          I have done some more research and found that this term is used by LVT, but not in reference to 999 year leases.

          As an example, in LVT case 1159, an uplift of 1% was applied to the estimated unimproved market value of the flat with a long lease, giving the virtual freehold. This virtual freehold is considered part of the freeholder’s present interest and is used to calculate the reversion. Needless to say there are other cases where this uplift was not applied!

          This pumping up of the reversion figure is what has happened to me.

          I can see the point of the uplift when applying for freehold along with the lease extension, i.e. enfranchisement, but not for a lease extension alone.

          If someone would explain to me what this means, I would be most grateful

          Comment

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