Article

Premiums for leasehold extensions and enfranchisement set to rise

It has become commonplace for residential leaseholders to extend their long leases, if the term is becoming too short, or for groups of leaseholders to collectively enfranchise by purchasing the freehold of their building either through informal negotiations or by using the procedures laid down in the Leasehold Reform, Housing and Urban Development Act 1993. The 1993 Act provides a complicated
formula for valuers to follow when assessing the premium payable on a lease extension or enfranchisement based, amongst other things, upon the assumption of the amount which at the valuation date the freeholder's interest might be expected to realise if sold upon the open market to a willing buyer. This figure is obtained by ascertaining the open market value of the freehold with vacant possession at the valuation date, and then applying a discount, called the "deferment rate", to reflect the fact that vacant possession will not actually be available until the term of the lease expires. The lower the rate, the greater the premium payable. In recent years, valuers in the South East (outside London) have tended generally to apply a deferment rate of between 7% and 8% in their calculations. In the Lands Tribunal case of Earl Cadogan and Cadogan Estates Limited v Sportelli, which involved five appeals heard together on 15 September 2006, the Tribunal recommended that when making these calculations valuers should take into account not only property market evidence but also financial evidence similar to that used for other investments. The Tribunal felt that as yields on all other investments had been dropping over the years, it was unfair on freeholders for the deferment rate to remain unchanged. Consequently, the Lands Tribunal now recommends a deferment rate of 5% is adopted and applied irrespective of the location of the premises, its condition or the length of term left. The consensus amongst practitioners is that the outcome of the Sportelli decision will see freeholders demanding significantly higher premiums, and for ongoing cases the risk of some difficult renegotiations over premiums. Freeholders and leaseholders facing lease extensions or enfranchisement are recommended to obtain professional legal and valuation advice at an early stage.

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