What is Long Lease Value?
A long lease value is what a property is worth when it has over 150 years left on the lease - this is so long it is deemed a 'virtual freehold'. Under the Leasehold Reform, Housing and Urban Development Act 1993, this value becomes particularly important because it helps determine the premium payable for lease extensions and freehold purchases.
A Simple Example
Imagine three identical flats in a building:
- Flat A has a share of the freehold and worth £500,000
- Flat B has a 149-year lease and is worth £495,000
- Flat C has a 90-year lease and is worth £464,000
Even though all these flats are identical due to the different lease lengths they're worth different amounts. This is because the market recognizes that a lease, no matter how long, is still not quite as valuable as owning the freehold outright.
Why It Matters to You
The long lease value is a key part of the premium you pay to extend your lease or buy the freehold under the 1993 Act
How are long lease values calculated?
The 1993 Act requires several specific assumptions when calculating long lease values. When looking at market evidence you have to adjust this data based on the following assumptions:
- A willing seller in the open market
- The lease has no rights under the 1993 Act
- No improvements by the tenant are included
- The terms in the existing lease remain when sold
- Neither party is in breach of the terms of the lease
- The condition of the property is "mid-market"
As a result of this you have to find transactions in the market which are:
- Recent in time
- Similar floorplan / layout of the property
- Similar lease lengths
- Near to or in the same location
- Within a comparable building
- On a lease of similar terms
Once you have this data you then need to account for the long lease value.
Once you have adjusted the market transactions to account for this you then need to adjust for the different lease lengths of those transactions. You do this by adjusting the relative value of the lease lengths. There are two accepted ways to adjust for these "relativities".
1. Using Market Evidence
This is the gold standard and recommended by RICS. In this approach valuers try to find transactions which are:
-
2. Using Relativity Curves
There are several graphs which have been the result of various Tribunal and Court hearings. The key cases are
- Earl Cadogan v Erkman established the standard percentages for long leases
- Sportelli provided guidance on calculating values
- Mundy helped clarify how to use market evidence
Erkman case which clarified leases from 100-130+ years
From these cases there are a handful of curves
- Savills 2002 graph (for leases with Act rights)
- Gerald Eve graph (for leases without Act rights)
- Zucconi
How do you calculate the long lease value?
When valuing a long lease, market evidence from real property sales should be the most reliable guide to value. However, there's a complex relationship between actual sales prices and the values we need for lease extensions. There are several challenges with calculating the long lease value which arise due to
