Calculating Lease Extension Premium

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    Calculating Lease Extension Premium

    I am the freeholder/landlord. The tenant requested an extension of lease and offered to use his people to calculate the premium as follows:
    Lease 125 years from 24/6/1969 to 23/6/2094 with term remaining of 82 years.
    Ground Rent £26.25 for 33 years, £39.37 for next 33 years and £59.06 for next 33 years.
    Capitalisation Rate 7%.
    Deferment Rate 5%.
    Unimproved Extended Lease Value £220,000.
    Freehold Reversionary Value (UELV+1%) £222,000.
    PREMIUM = £4355.00

    I queried the valuation as it appeared low for a 3-bed converted flat with share of garden in Palmers Green, North London, and he now says he will accept a valuation of £230,000.
    I would be most grateful if the calculation above could be checked for accuracy and whether there will be much difference if the property is valued at £230k rather than £220k.
    Having read other threads am I right in thinking the Capitalisation Rate at 7% is too high?

    Many thanks,

    Victor J

    #2
    As the freeholder, you can get your own surveyor in to do the assessment and this will be paid by the leaseholder.

    Comment


      #3
      I am aware of that but if these figures stack up then I am prepared to proceed. Does anyone know if they are accurate?
      Many thanks, Victor J.

      Comment


        #4
        The cost of the lease extention in this case, as the term is above 80 years, is the capitalisation of teh rent and the deferred value of the reversion

        The ground rent is very low but I am puzzled that on a 125 year lease the rents rise every 33 years and if it did I would have expected it to be 33/33/33/26. A discount rate of 7%is reasonable the best you could hope for is 6.5% and if you did suceed in getting that rate it would effect the price payable by just £50.

        The discounted value of the reversion. They are using 5% and you will not do any better than that. If the property is valued at £220k this discounted at 5% over 82 years is worth £4,026 at £230k it is worth £4,209 a difference of £183. ( the value of the flat at the expiry of the new term of 172 years has been ignored it effects the premium by around £50)

        If you have a contested valuation the valuation date is the date the notice is served. If it drags on the valuation date is still fixed at that date and you will not get interest on the premium from that valaution date until the date of completion. You will of course get the ground rent income.

        As you will see from the figures above unless you feel that £230k is still too low I would strongly advise you to accept their offer. I would suggest you seek a further £300 on the basis that they serve a Section 42 Notice on you at £4655 (ie £4,355 plus £300) on the strict understanding that you will not instruct a valuer (which they would ordinarily have to pay for by them serving the Section 42 Notice and that they pay your reasonable solicitors costs. It should be possible to find a solicitor to deal with the deed if it is not contentious for around £400 to £500.

        In other words you want £300 for being Mr Reasonable. They should jump at that because a contested claim would easily incur them having to pay £1,500 in landlords costs plus more for their own professional fees

        Comment


          #5
          Originally posted by sgclacy View Post
          The cost of the lease extention in this case, as the term is above 80 years, is the capitalisation of teh rent and the deferred value of the reversion

          The ground rent is very low but I am puzzled that on a 125 year lease the rents rise every 33 years and if it did I would have expected it to be 33/33/33/26. A discount rate of 7%is reasonable the best you could hope for is 6.5% and if you did suceed in getting that rate it would effect the price payable by just £50.

          The discounted value of the reversion. They are using 5% and you will not do any better than that. If the property is valued at £220k this discounted at 5% over 82 years is worth £4,026 at £230k it is worth £4,209 a difference of £183. ( the value of the flat at the expiry of the new term of 172 years has been ignored it effects the premium by around £50)

          If you have a contested valuation the valuation date is the date the notice is served. If it drags on the valuation date is still fixed at that date and you will not get interest on the premium from that valaution date until the date of completion. You will of course get the ground rent income.

          As you will see from the figures above unless you feel that £230k is still too low I would strongly advise you to accept their offer. I would suggest you seek a further £300 on the basis that they serve a Section 42 Notice on you at £4655 (ie £4,355 plus £300) on the strict understanding that you will not instruct a valuer (which they would ordinarily have to pay for by them serving the Section 42 Notice and that they pay your reasonable solicitors costs. It should be possible to find a solicitor to deal with the deed if it is not contentious for around £400 to £500.

          In other words you want £300 for being Mr Reasonable. They should jump at that because a contested claim would easily incur them having to pay £1,500 in landlords costs plus more for their own professional fees
          I very well put and sensible answer and one which I take the OP will act upon.
          Kikuyu

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