Capitalisation Rate for Lease Extension Premium Calculation

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    Capitalisation Rate for Lease Extension Premium Calculation


    With help from the formula kindly provided by Sgclacy, I have been able to work out various capitalised ground rent values for the lease extension I am about to embark on. What I'm trying to work out is what capitalisation rate a tribunal would set if it went that far, or what rate the freeholder is likely to start the bidding at.

    My lease was granted in 2001 for 99 years.

    In 2012, in return for confirming the loft space in the demise of the lease, the ground rent was set at £350, doubling every 20 years.

    So from now:

    350 for 16 years
    700 for 20 years
    1400 for 20 years
    2800 for 20 years
    5600 for 8 years (I may have this wrong but as it doesn't kick in for ages i don't suppose one or two years makes a difference).

    I've looked through a great deal of tribunal decisions and it seems that when you have this kind of rising ground rent you face a double whammy as the freeholder pushes for a lower capitalisation rate because the ground rent is attractive to investors.

    Any ideas what I can expect them to set the rate at? And what the tribunal is likely to decide on? And, indeed, what rate I should set out in my offer (I will get legal advice, I just want to know for myself what I'm doing first)?

    I've seen that capitalisation rates vary between 6% and 7.5% in recent tribunal decisions, though I did see one at 5.5% Is there any chance it could be set at 5% or even lower at tribunal?
    If I'm offered 5% by the freeholder, should I go to tribunal hoping for 6% or 5.5% or just accept and lose a couple of thousand £?

    Also – my solicitor was potentially at fault here. He did not at any point suggest that rising ground rent has implications for the lease extension premium. Worse, in his precis of the lease, he stated that the ground rent was due to double in 2032 and on the twentieth anniversary, neglecting to mention the two further doublings. Do I have grounds to seek compensation? And would it even be worth it in this case?

    The price of the property was reduced from the initial asking price by £20,000 because of the low lease – but that could have just been an estate agent's trick. It wasn't reduced at my asking, it was just put on once at X and then again two weeks later at X - £20,000.

    With many thanks for any help anyone can offer!


    P.S. Since I am going to end up paying handsomely for the damned loft, can I deduct its value from the long lease value for determining reversion (is it even worth it?).

    do the rent reviews start 20 after the amendment or from the start date back in 2001. If the later you may only be 4 years away from a rent review. Check that point carefully if it is the later then you really do have a problem on your hands and need to take immediate action against your solicitor


      Thanks for your reply. There is specific reference to the ground rent remaining at £350 until June 2032, so I think that nightmare is averted.


        The exact terms:

        "From the date hereof until 23 June 2032 Three Hundred and Fifty Pounds per annum (£350) doubling on 24 June 2032 and every twentieth anniversary thereafter such rent to be payable on 24 June in each year save that the first payment of rent from the date of this Deed until 23 June 2013 shall be paid on the execution hereof."

        And the solicitor's summary, which did not communicate to me a continuing doubling (but may to others)

        "As as result of the Deed of Variation, the ground rent is now £350 a year and will double on 24 June 2032 and the on the 20th anniversary of that date"

        To be honest, assuming I am not liable to pay a fortune for the lease extension, I'm not that bothered by any lapse in summarising the ground rent, since the increases after 56 years are diminished by capitalisation.


          Since you are already in a lease paying 350 p.a ground rent for next 16 years , I would suggest you consider applying for a statutory 90 years lease extension at peppercorn ground rent to cancel the the future rises in ground rent payment using additional loan from your existing mortgage lender.


            Thank you for your advice – that's exactly what I intend to do. I'm just wondering what the premium is likely to be, and what capitalistation rate is realistic when calculating the ground rent component.


              At 6% the premium would be £10,310 plus 1.66% of the flats value
              plus the landlords legal and valuation fee plus your own

              A variation in the rate of 0.25% alters the premium by around £700

              In view of the size of the rent I think it likely that the capitalisation rate will fall in the range 5.75% to 6%


                Thank you very much!


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