Lease Extension from 47 years

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    Lease Extension from 47 years

    Currently I have a lease which has 47 years unexpired life. I wish to sell the property but need to extend the lease to a minimum of 90 years and a maximum of 125 years. I am currently paying £8.49 per annum ground rent.

    The property is worth between £160,000 and £180,000.

    The freeholders are asking us to increase the lease to 125 years for a cost of £35,850 plus £695.00 + vat legal/admin costs plus £550.00 valuation fee.

    The revised ground rent is £200 per annum to increase every 20 years by the higher of the increase in RPI or twice the current ground rent

    Could you please advise if their offer is reasonable or if there is a formula which will allow me to calculate what the correct increase should be

    #2
    Plese confirm the value of your flat with an extended lease and a negligble ground rent

    Comment


      #3
      Originally posted by kevin cummins View Post
      The freeholders are asking us to increase the lease to 125 years for a cost of £35,850 plus £695.00 + vat legal/admin costs plus £550.00 valuation fee.
      In my experience, there is negligible benefit in paying to extend the lease beyond 99 years - it is seldom reflected in the sale price.

      You will therefore be paying a proportion of the marriage value for an extra 26 years that will only benefit some future owner.

      I strongly suggest that you re-negotiate the cost based on a 99 year lease
      On some things I am very knowledgeable, on other things I am stupid. Trouble is, sometimes I discover that the former is the latter or vice versa, and I don't know this until later - maybe even much later. Because of the number of posts I have done, I am now a Senior Member. However, read anything I write with the above in mind.

      Comment


        #4
        Originally posted by Esio Trot View Post
        In my experience, there is negligible benefit in paying to extend the lease beyond 99 years - it is seldom reflected in the sale price.

        You will therefore be paying a proportion of the marriage value for an extra 26 years that will only benefit some future owner.

        I strongly suggest that you re-negotiate the cost based on a 99 year lease
        If you are planning on selling immediately or are certain you will sell in the next few years then I tend to(but not completely) agree.

        If there is any chance whatsoever that you might own for 20 years plus / leave to kids etc etc, then exercise your rights, get a 90 year extension a sleep easily knowing your grand-kids won't even need to extend.

        Comment


          #5
          I would like sell now, and would like to know if there is a formula to calculate the review. I would also like to know if there is a governing body to ensure that the review is fair and an official appeal process as it seems that I am at the mercy of the landlord.

          Comment


            #6
            The flat is worth c. £160k without the lease extension and c. £180K WITH

            Comment


              #7
              As we know there are THREE parts to the valuation

              1) Capitilisation of the rent

              £8.49 at say 9% (High in view of the small amount and the collection costs) Say £100.

              2) Discounted value of the reversion

              £180,000 discounted back at 5% = £18,170 (difficult to argue against Sportelli even more so when long term interest rates are so low)

              3) Marriage value

              This is where the real movement in the value will be.

              If we look at Beckett and Kays graph of graphs for mortgage dependant property at 47 years for mortgage dependant property this gives 60%

              £180,000 X (100% -60%) = £72,000

              Take the £72,000 less the figures in 1 & 2 above

              £72,000 - £100 - £18,700 = £53,200 @ 50% = £26,600

              Premium for a 90 year extension = £100 + £18,700 + £26,600 = £45,400*

              (a small adjustment of £225 is required to reflect the fact the freeholder has the benefit of the reversion in 137 years time, again discounted at 5%. I do not normally show this in worked examples as I am trying to show the main principals)

              The offer by the freeholder is for a premium and a new rent , the above calculation assumes that a statutory extension is sought resulting in a 90 year ext to the remaining term and a peppercorn rent.

              The rent the freeholder wants is worth around £3500 the index linking is attractive although its advantage is somewhat reduced by the 20 year review. The future value of the reversion in 125 years time if discounted at 5% is worth effectively nothing and no investor would place any real value on that element.

              So his deal is worth £35,850 Plus £3500 = £39,350 so it seem reasonable.

              Now some of this forum believe that Beckett and Kayes graph is misleading so we need to then calculate what relativity you would need to argue to displace the landlords offer

              £100 + £18,700 + ((180,000 * X) -100-18700)/2) = £39,350

              £18800 + ((180,000 * X) -100-18700)/2) = £39,350

              (180000X – 100 – 18700)/2 = 20,550

              180000X – 100 – 18700 = £41,100

              180000X = £59900

              X = 0.3327

              Relativity = 100 – 33.33= 66.72% say 67%

              Conclusion unless you feel you can achieve a relativity figure greater than 67% the landlords offer appears reasonable. In view of the fees you would incur on your side I suspect you would need to achieve over 70%.

              Refer to the graph http://www.beckettandkay.co.uk/pdfs/Graph_of_graphs.pdf
              And you will see that it may on balance be advisable to accept the landlords offer UNLESS you feel property prices still have a long way to go down

              If negotiations breakdown then the matter can be reffered to the LVT

              Comment


                #8
                sglacy appears to me to be a biased landlord. he wants to propagate high premiums.

                I am a biased surveyor (i want work!) therefore i will always recommend that you take professioanl advice

                I completely disagree with his methodology and think the premium should be £29k-£45k (very very very rough calcs). I'd liek to think £35k is 'fair'.

                If you are happy to risk paying £10,000 too much for the sake of a sub-£500 valuation then listen to sglacy.

                If you think £10k is a huge amount of money, want peace of mind and professional advice then pay for it!

                Comment


                  #9
                  I resent the accusation that I am biased.

                  I showed how I arrive at my figure showing the evidence I used, I then put a caveat on the figure and then show what relativity is necessary to achieve to make it worthwhile challenging the landlords offer.

                  I would have thought my advice would have been of some use to the lessee in deciding to appoint a surveyor. It identifies the key issue that needs to be addressed. He can then approach a surveyor to see what are the chances of trying to get the relativity up above 70%, if the surveyor thinks it unlikely then the landlords offer is probably worth taking up.

                  Comment


                    #10
                    Kevin,

                    I am a landlord! I agree with James' range of possible values and I have also run my calculations against sgclacy's and agree with the vast majority of what he saying.

                    You need to know that it is, in my experience, quite normal for surveyors acting for each side to disagree (often strongly) with their opposite number like this. This thread may grumble on for days now but you will probably not get much further benefit from it.

                    You originally asked if there is "...a formula which will allow me to calculate what the correct increase should be...". The real answer is that there is a formula (as used by sgclacy and James) but many of the important variables do not have values that everyone agrees on. So there is no one "correct" answer.

                    The price you have been given may be about right but I would be surprised if a professional could not improve it. For short leases such as yours it is invariably the case that a surveyor costing, say, £450 + VAT can succeed in reducing the freeholder's price by more than his fee. He will do this by picking values in your favour for the variables that are commonly disputed. In your case, even if your surveyor reduces the landlord's price to £35,000 it would still have been worth you appointing him.

                    Of course, as the lessee you pay for both the landlord's surveyor and for your own to fight over the price you will pay but that's the system. You will pay over £1,000 to have two professionals agree your price.

                    I think the best surveyors for lessees usual react like James - they disagree with the other side wherever possible and fight to get the best deal for their client. Make sure you pick a "live one"!!

                    Comment


                      #11
                      I would like to thank you all for your very valued imput to my questions.I will now take a day or two to digest your answers and hopefully come to a suitable way foreward.

                      regards

                      Kevin

                      Comment


                        #12
                        Lease extension premiums are about negotiation between the freeholder and the lessee. Hopefully the members' replies give the original poster something to think about.

                        I am sure many silent readers appreciate the calculations offered by the members. In future it would be nice if the members offering calculations would do that and not pooh-pooh others'.

                        Comment


                          #13
                          Originally posted by sgclacy View Post
                          I resent the accusation that I am biased.

                          I showed how I arrive at my figure showing the evidence I used, I then put a caveat on the figure and then show what relativity is necessary to achieve to make it worthwhile challenging the landlords offer.

                          I would have thought my advice would have been of some use to the lessee in deciding to appoint a surveyor. It identifies the key issue that needs to be addressed. He can then approach a surveyor to see what are the chances of trying to get the relativity up above 70%, if the surveyor thinks it unlikely then the landlords offer is probably worth taking up.
                          I did not come on this site looking for a fight. I am sorry I said that you are biased, but I have not seen evidence to counter that. I admit my biased to always apppointing a surveyor!

                          For the inexperienced here remember the lower the relativity the better for the landlord. You have referred to the Beckett and Kaye Graph of Graphs and used 60% for 47 years.

                          My reading of the graph of graphs is that 63% to 80% is the range at 47 years. A simple analysis might be that half way between - say 72% - is 'unbiased'. I tend to work on the basis that LVT line less 2% is not far off what you might get at the LVT, with that reduction from LVT line increasing a bit as the lease gets shorter. (This is a very rough guide and of course location and the evidence you can come up with to support the relativity at different lease lengths.) LVT line less 4% at 47 years is about 73%. This is probably not a bad 'back of a fag packet' estimate.

                          The only reason I can see for using 60% is that it is a reasonable 'landlord's starting point for negotiations' figure (unless you have settlement evidence to back up 60%... have you?)

                          Comment


                            #14
                            Originally posted by Poppy View Post
                            Lease extension premiums are about negotiation between the freeholder and the lessee. Hopefully the members' replies give the original poster something to think about.

                            I am sure many silent readers appreciate the calculations offered by the members. In future it would be nice if the members offering calculations would do that and not pooh-pooh others'.
                            I do not wish to 'pooh-pooh others', however I regard sglacy's advice as pretty much equivalent to a car showroom owner going onto a car website and advising potential car buyers that the list price is good value and trying to haggle is a waste of time.

                            Leaseholders need a best and worst case scenario, a best estimate of fair, and (IMHO) a likely spread around fair.

                            eg best case £5k, fair £10k, worst £15k likely range £8k to £12k (90% chance in this range).

                            It seems to me that sglacy is happy to say £14k - a figure which is potentially misleading.

                            Comment


                              #15
                              Could I suggest that anyone offering lease valuation opinions here might add the caveats that "The possible range of prices might be..." and, if the contributor wishes, also "My personal opinion is that the price should be ..."?

                              The only true price for a new lease is the one that prevails at the time it is signed. Everything else is opinion until then.

                              Comment

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