What's in a Freehold Enfranchisement Valuation?

To get your head around this you need to understand that whilst each lease is valuable to its leaseholder today, at whatever it could be sold for in the market place, each lease is also valuable to the Freeholder who

• receives investment income from it (the ground rent)
• has the hope value of a premium from you (for buying a lease extension)
• holds the reversionary interest (the value of a vacant flat in XX years time)
• probably makes commission from placing insurance on the block
• may have unleashed development potential (roof spaces, rights to build over garage blocks, dis-used air raid shelters capable of development)

This is a specialist area of valuation that needs some understanding as the valuation methodology involves the following elements:

1. Market values of the flat for flats with less than 80 years unexpired on the basis of
   1. a short lease with ground rents payable as covenanted under the lease
   2. a long lease with peppercorn ground rent payable
2. The value of the landlord's interest
   1. ground rent receivable as covenanted under the lease
   2. present value of the reversionary title (a vacant flat) at the end of the lease
3. Marriage value ie, the difference between (a) and (b) above
4. The value of any appurtenant property (other interests owned by the freeholder in the Freehold title that are not already demised to lessees, i.e., garages, attic space, land)
5. The value of any other income, insurance commissions etc...

Understanding valuation science

The science of valuation enables us to calculate the "present value" of the future right to your vacant flat and enables us to value the ground rent (an income stream for a term of years.

The valuer will consider market evidence and settled caselaw to select the appropriate capitalization rate upon which to base our valuation of the ground rent. In simple terms this could be a rate derived from or comparables such as gilts yields (gilts are government bonds), interest rates paid on bank credit balances, the bank base rate and a premium for the perceived risk of investing in property etc….

He/she will select the appropriate deferment rate by which it is reflected that the reversionary value to the landlord is some years away.

There are arguments that the capitalization rate for ground rent payable to an intermediate landlord should be capitalized at a different rate to ground rent payable to a Freeholder. We can talk you through such arguments, but essentially it all relates to the perceived quality of each as a provider of investment income.

The valuers will draw from market evidence and settled caselaw the improvement rate which is the percentage by which the value of the flat would increase from being granted a statutory 90 year lease extension. This is subjective and probably the most argued point at First Tier Tribunal. Negotiation factors will be the length of the lease unexpired lease as opposed to the length of a typical lease in the area. For example, in Knightsbridge where short leases are common place it could be argued that the improvement rate would be less than where short leases are uncommon.

Remember, since July 2003, the improvement rate is 0% if your lease has more than 80 years unexpired! This means you compensate the Freeholder for the loss of ground rent but do not have to pay marriage value.

For Enfranchisement application the valuer also has to assess the any development rights in the property. This requires an understanding of:

1. development potential and development costs (build costs, building regulations ie, is a top floor walk up flat actually possible without provision for a secondary means of escape),
2. planning densities for the area, borough, planning prescedents locally and likelihood of a planning consent being forthcoming to increase the amount of accommodation built on the site.
3. what is "demised" to the lessees and what of value is still vested in the Freehold title
4. what is "allocated" and what the permitted use is. For example if a roof space is allocated for storage purposes, a collective enfranchisement application may release it for potential development.

Preparing for the valuation

We need:

1. to build an understanding of how many types of lease there are at the block, in an ideal world all flats would have been sold off on or around the same time and therefore leases would all start on the same date and be for the same number of years, with ground rent typically varying depending on the size of the unit. However, we have been involved in scenarios where there are up to 10 different types of leases, together with other complications such as garages on separate titles with varying ground rents payable also.
2. A copy of each lease type as this will set out the ground rents covenanted during the term (unless all leases are the same). From the lease we will derive the ground rents covenanted during the term (it is common for the ground rent you pay today to rise as the lease gets shorter). For larger sites where ground rent varies from flat to flat a schedule of ground rents and review dates/amounts is helpful.
3. To inspect most flats and understand the context of the building in which they are situated, for flats we cannot get access to we will request sight of the lease plan to clarify the layout. Without doing so it would be impossible to carry out the marriage value part of the valuation
4. The Leasehold Guidance Service is part of the Ringley Chartered Surveyors (http://www.ringley.co.uk) therefore a Chartered Surveyor will carry out the valuation for you

Our valuation report includes a full commentary on

1. comparable evidence to support our opinions
2. analysis of how we select the investment yield
3. recent court decisions re: marriage value (the difference in value between a short lease and a virtual freehold)
4. advice on what you should serve as the price on your initial notice

Cases where there is an intermediate landlord

Where due to an intermediate interest such as a headlease we have to consider additional valuation factors under paragraph 8(1) of Schedule 13, or paragraph 8(3) such as where an intermediate interest receives a profit in ground rent or has a reversionary interest of more than 5 days it may be required to be valued as a wasting asset which would according to case law require a sinking fund and tax to be allowed for. Valuing an intermediate interest adds to our standard fee structures.

Our fees reflect the amount of research necessary to fulfill the valuation methodology set down in law and to enable us to provide you with not only a valuation but elemental reasoning behind each part. From all this we are able to piece together the eventual "valuation" "premium that should be paid"

Where development rights are considered complex and involve liaison with architects, carrying out planning research, research as to build costs etc…. Then a supplemental fee will be payable on a time basis. An indication will be provided to you prior to proceeding with such additional work.

The leaseholder claiming his rights is the party that in law is responsible for both parties costs and it is my understanding that if the residents have served Notice then the Landlord's surveyors fees form part of the purchase price together with reasonable legal fees.

Learn more about the Leasehold Guidance Complete Service