What is Deferment Rate?
The deferment rate is one of the most important factors in calculating how much you'll need to pay your landlord to extend your lease. While it sounds complicated, it's actually based on a simple principle: how much should your landlord be compensated for having to wait longer to get their property back?
A Simple Example
Imagine you own a building worth £500,000 and you've rented it to someone for 50 years. At the end of those 50 years, you're supposed to get your building back. But now your tenant wants to extend their lease for another 50 years?
The big question is: How much should they pay you today for making you wait an extra 50 years to get your building back?
This is where the deferment rate comes in. It is part of the equation used to calculate that:
- What is the value of the property today?
- How long until the landlord was supposed to get it back?
- How much longer will they have to wait to get it back?
- What is the deferment rate?
The deferment rate effectively says: "Money today is worth more than money in the future." It's like if someone said "I'll give you £1,000 in 50 years" - you wouldn't value that the same as getting £1,000 today.
Why It Matters to You
The deferment rate has a huge impact on how much you'll pay for your lease extension. Here's the key thing to understand:
- A lower deferment rate = You pay MORE
- A higher deferment rate = You pay LESS
This is because a lower rate means the landlord's future interest is considered more valuable today.
What Deferment Rate Applies to Me?
Following landmark legal cases (particularly the Sportelli case), we have standard rates:
- 5.00% for flats
- 4.75% for houses
However, whilst these rates are the market norm and usually accepted, there are other factors that could be used to negotiate a different outcome. In particular :
- Whether the property it outside Prime Central London
- If your current lease has less than 20 years left
- If there are any management issues with the block
- There are particularly unusual or special characteristics
Why It's Called "Deferment Rate"
The term "deferment rate" comes from the concept of "deferring" or "postponing" something - in this case, the landlord's right to get their property back.
Future Changes
The government is considering leasehold reforms that might affect how deferment rates are calculated. However, until any changes become law, the current system based on the Sportelli case remains in place. Whilst there is no certain outcome based on the likely human rights claims by Landlords it is possible that in order to offset the loss of marriage value the deferment rate will fall which will increase the premium payable.
