Cost of extending a lease - Calculations

michaelsft

Hi all, I've been looking at online lease extension calculators but they all seem too basic and none give options for increasing ground rent. Some ask for an average but I doubt this means literally working out everything that would be paid and dividing that by the number of years as that wouldn't take inflation into account. So how would someone calculate this figure? I'd love to know the formula even if it is merely for an estimate.

I would be very grateful if someone could help me out with this query.

Thanks 

eddddy

Well...   the formula is here: https://tartarus.org/martin/leasehold.htm  (Good luck!)

Or it might be easier to follow the explanation here: https://www.lease-advice.org/advice-guide/lease-extension-valuation/


To simplify things a bit, you could:

a) Specify a ground rent of zero with an online calculator - to work out the freeholders loss due to delayed reversion (and marriage value, if appropriate)

b) Calculate the compensation due to lost ground rent in a spreadsheet

And add a and b together.

michaelsft

Thanks for the advice eddddy, part a is pretty simple of course and came out to £1k, part b is... a work in progress and by that I mean I have no idea. It's a great shame there's no online calculator that would take this into account or at least an easy way to calculate the 'average' that it requests. If the total amount payable over the course is £77,500 over 125 years (like mine) then surely it's not just a case of dividing the two numbers to get an average right? It needs to take the value of the cash over different time periods into account right?

eddddy

michaelsft said:

If the total amount payable over the course is £77,500 over 125 years (like mine) then surely it's not just a case of dividing the two numbers to get an average right? It needs to take the value of the cash over different time periods into account right?

That would over-state the amount you'd have to pay - probably by a lot.

• The amount of ground rent due in, say, the first 25 years is quite significant. 
• The ground rent payable from, say, year 50 onwards is almost completely insignificant.
• e.g. £100 payable in 50 years time might be worth 85p today
• e.g. £100 payable in 100 years time might be worth less than 1p today

So you don't want to average out high ground rents due in 50 or 100 years time, with low ground rents due over the next 25 years.

What are your actual ground rent figures payable over the 125 year lease?

michaelsft

Thanks again for the reply! So it’s a 125 lease that starts at £100/year and doubles every 25 years. It has 110 years left on the lease.

10 years at £100
25 years at £200
25 years at £400
25 years at £800
25 years at £1600

eddddy

So there's 110 years left on the lease.

Valuer's will argue what "Yield" to use - typically it will be around 6% or 7% for lease extensions.  (Yield is the 'discount rate' - it's a bit like the "Inflation Rate")

• With a yield of 7% - I make the present day value of your ground rent: £2,544
• With a yield of 6.5% - I make the present day value of your ground rent: £2,872
• With a yield of 6% - I make the present day value of your ground rent: £3,283

So your valuer might argue that a yield of 7% is correct, but the freeholder's valuer might argue that 6% is correct. (And there may be special cases where a very different yield is correct.)

So add the £1k you've calculated to one of the numbers above - to give you an idea of the total premium payable.

michaelsft

Thanks very much, that explains things very nicely. I should be looking at somewhere in the region of 4-5k in a couple of years time plus solicitors fees.

​​​​​​​Really appreciate the help!