After statutory lease extension, peppercorn (£0.01 per annum) ground rent will be payable. This essentially means that the lease will become rent free. The leaseholder(s) must hence compensate the freeholder(s) for loss of future ground rent during the lease extension process. This future rent is capitalised into a lump sum constituting part of the cost of the lease extension.
Current ground rent payments will be worth less in real terms in the future due to general inflation. Future ground rent is hence discounted using a percentage value known as the 'Capitalisation Rate'. A high Capitalisation Rate (7-8%) results in a lower ground-rent compensation being payable to the freeholder. A lower rate (5-6%) will mean that more is payable.
Generally the Capitalisation Rate will be in the region of 6% or lower. Higher rates are normally only seen with low, static ground rents or for properties outside of Prime Central London. You may review previous rate determinations for the SE2 area at the Tribunals Judiciary (see freehold purchases or lease extensions) or via Leasehold Advisory Service (links opens in new tab).
Once a lease has less than 80 years remaining, legislation stipulates that the increase in the value of the flat caused by lease extension or freehold purchase must be shared 50:50 with the current freehold owner. This additional charge is known as 'Marriage Value'.
The relevant increase in flat value is determined by 'relativity' - the value of the flat with current lease as a percentage of the market value with share-of-freehold. Previously relativity was estimated by averaging values from historical, negotiated settlement graphs published in the 2009 RICS publication 'Leasehold Reform: Graphs of Relativity'. Following Sloane Stanley Estate v Mundy [2016] UKUT 0226 (LC), Mundy v Sloane Stanley Estate Trustees [2018] EWCA Civ 35, Reiss v Ironhawk Ltd [2018] UKUT 311 (LC), Barry and Peggy High Foundation v Zucconi [2019] UKUT 0242 (LC) and Deritend Investments (Birkdale) limited v Treskonova UT [2020] UKUT 0164(LC) however, this is no longer the accepted approach.
These case precedents prescribe that a valuer should primarily consider real-world evidence of relativity - comparable short-lease and long-lease/freehold-share flat sales in the local area.
By default, as per these recommendations, FreeLee's web app follows the approach taken in Peggy High Foundation v Zucconi. You may, however, decide to manually enter a percentage value for relativity based upon local sales data (strongly preferred if such data is available) or select different relativity curves in line with previously applied methodology (potentially useful for negotiation purposes but with limited prospects for success at a Tribunal hearing).
Graphs of Relativity
Select which relativity graphs to apply to the valuation. The default options are pre-selected:
Because of a legal technicality, properties must be valued as if the right to freehold purchase or lease extension - provided by the Leasehold Reform Housing and Urban Development Act 1993 (LRHUDA 1993 - 'the Act') - does not exist.
The best evidence of property market value is obtained from comparable, recent sales in the immediate vicinity. These represent, however, "real-world" sales where the right to freehold purchase or lease extension is available. A discount from the real-world sale value must hence be made to take account of Act rights.
In this instance, FreeLee's web application employs the approach detailed in Barry and Peggy High Foundation v Zucconi [2019] UKUT 0242 (LC). A comparison is made between the Savills 2015 Enfranchiseable curve (which reflects real-world data) and an average of the Savills 2015 Unenfranchiseable curve and Gerald Eve 2016 Unenfranchiseable curve (which represent "no-Act world" data).
The relevant curves were detailed in a 2016 Savills publication and in the 2016 Gerald Eve publication (links open in new tab).
Savills 2015 Enfranchiseable
The Savills 2015 Enfranchiseable graph is derived from a hedonic regression analysis using Lonres data for 5,904 sales of leasehold flats from January 2010 to June 2015.
Savills 2015 Unefranchiseable
The evidence available to assess the discount required from the Savills 2015 Enfranchiseable curve is scarce. Savills compiled a range of reference points for the discount required and fitted a curve through these reference points.
Gerald Eve 2016 Unefranchiseable
This curve represents value of leasehold interests compared to value of corresponding freehold for different unexpired terms. Leasehold interests are assumed to be subject to nominal ground rents and exclusive of tenants’ rights to enfranchise.
Because of a legal technicality, properties must be valued as if the right to freehold purchase or lease extension - provided by the Leasehold Reform Housing and Urban Development Act 1993 (LRHUDA 1993 - 'the Act') - does not exist.
The best evidence of property market value is obtained from comparable, recent sales in the immediate vicinity. These represent, however, "real-world" sales where the right to freehold purchase or lease extension is available. A discount from the real-world sale value must hence be made to take account of Act rights.
In this instance, FreeLee's web application employs a variant of the approach detailed in Reiss v Ironhawk Ltd [2018] UKUT 311 (LC). A comparison is made between the Savills 2015 Enfranchiseable curve (which reflects real-world data) and the Savills 2015 Unenfranchiseable curve (which represents "no-Act world" data).
The relevant curves were detailed in a 2016 Savills publication (link opens in new tab)
Savills 2015 Enfranchiseable
The Savills 2015 Enfranchiseable graph is derived from a hedonic regression analysis using Lonres data for 5,904 sales of leasehold flats from January 2010 to June 2015.
Savills 2015 Unefranchiseable
The evidence available to assess the discount required from the Savills 2015 Enfranchiseable curve is scarce. Savills compiled a range of reference points for the discount required and fitted a curve through these reference points.
Because of a legal technicality, properties must be valued as if the right to freehold purchase or lease extension - provided by the Leasehold Reform Housing and Urban Development Act 1993 (LRHUDA 1993 - 'the Act') - does not exist.
The best evidence of property market value is obtained from comparable, recent sales in the immediate vicinity. These represent, however, "real-world" sales where the right to freehold purchase or lease extension is available. A discount from the real-world sale value must hence be made to take account of Act rights.
In this instance, FreeLee's web application takes advantage of the approach detailed in 82 Portland Place (Freehold) Ltd v Howard de Walden Estate Ltd [2014] UKUT 0133 (LC). A comparison is made between the Gerald Eve 1996 curve (which pre-dates the Act and hence represents the no-Act world") and the Savills 2002 curve which reflects real-world data.
The relevant curves were detailed in a 2009 RICS publication (link opens in new tab)
Use of the Gerald Eve curve was recommended in Sloane Stanley Estate v Mundy [2016] UKUT 0226 (LC) and Mundy v Sloane Stanley Estate Trustees [2018] EWCA Civ 35. Following, however, Reiss v Ironhawk Ltd [2018] UKUT 311 (LC), Barry and Peggy High Foundation v Zucconi [2019] UKUT 0242 (LC) and Deritend Investments (Birkdale) limited v Treskonova UT [2020] UKUT 0164(LC) it is now considered to be an outdated approach.
Gerald Eve 1996
The graph was produced by Gerald Eve, in conjunction with John D Wood & Co, who were commissioned in 1996 by the Grosvenor Estate to compile a graph of leasehold relativities:
Types of property and approximate numbers analysed: Mainly Houses (above 90%)
Approx numbers: Above 200 by 1996
Geographical spread: Central London (W1, SW1, SW3 postcodes), comprising the Grosvenor Belgravia & Mayfair Estates and the Cadogan Estate.
Time spread of data: 1974 to 1996
Nature of data:
- a. settlements struck between 1974 and 1996 of prices for enfranchisements and lease extensions under the Leasehold Reform 1967, as amended, (houses) and the Leasehold Reform, Housing and Urban Development Act 1993, as amended, (flats). The settlement evidence is the outcome of negotiations. In most cases, both tenants and the landlords were represented by valuers experienced in leasehold reform and who had knowledge of the market at the time.
- b. prices realised on sales of non-enfranchiseable leases were used as comparables during the negotiations over the LRA claims referred to in (a) above. There was an abundance of such evidence in the 1970s / 80s.
- c. prices realised on sales for freeholds with vacant possession were also used as comparables during negotiations over the LRA claims.
- d. opinion derived from market experience. The leasehold interests are assumed to be subject to nominal ground rents and exclusive of tenants' rights to enfranchise.
The Graph has been tested continuously by challenges in negotiations and in evidence given to the Leasehold Valuation Tribunal and the Lands Tribunal. The Graph has been reviewed in the light of those challenges. It has not been amended, because it is believed that the evidence that was available then is stronger than that which has emerged since 1996. The underlying reason for this is that since 1993, and more so since 2002, there has been a drastic contraction in the supply of non-enfranchiseable leases, following the fundamental extension of rights to enfranchise permitted by the LRHUDA 1993 and latterly by the Commonhold and Leasehold Reform Act 2002.
It is considered that there is no reason for relativity to have changed over time. Gerald Eve's data base of settlements for the Grosvenor and Cadogan Estates has grown since 1996 and, in October 2008, includes circa 750 houses, 730 individual flats and 90 blocks of flats. For the majority, these further settlements are consistent with the Graph. John D Wood & Co withdrew their support for the Graph in March 2000, when that firm was no longer instructed by Grosvenor. Tenant/landlord: The Graph has evolved from Gerald Eve's advice given to landlords.
Savills 2002
Information on the Savills 2002 graph:
Types of property and approximate numbers analysed: Combination of 240 houses and flats.
Geographical spread: Central London
Time spread of data: Up to 1992 (prior to the 1993 Act) Revised up to 2002 (includes enfranchisable leases)
Nature of data: Published 2003.
Because of a legal technicality, properties must be valued as if the right to freehold purchase or lease extension - provided by the Leasehold Reform Housing and Urban Development Act 1993 (LRHUDA 1993 - 'the Act') - does not exist. It is important to note that the Gerald Eve graph excludes any such rights and hence no further discount is required.