Freehold Valuation Details
Overview Pros and Cons Qualification Valuation Procedure Alternatives Services & Costs
- Pro-Leagle takes all of these factors into account when assessing the value of a freehold. We reply upon lease documents, District Land Registry data and relevant decisions of the First-tier Tribunal (Property Chamber) and higher courts.
- You can purchase a Pro-Leagle valuation online. Our reports include full, worked calculations for each flat, valuation of development value due for any common parts (e.g. conversion of loft or cellar space) and discounts due for leaseholder improvements to the property.
The Ground Rent
- Ground rent is rent paid by the leaseholders to the freeholder under the terms of the leases. It is generally a relatively small amount per flat (£100 to £500 a year per lease).
- When purchasing the freehold the Leaseholders must compensate the Freeholder for their loss of future ground rent earnings. In order to do this the future ground rent owed to the Freeholder is amalgamated into a lump sum constituting part of the cost of the freehold purchase.
- In 70-80 years time, a ground rent payment of £100 will be worth much less in real terms due to general inflation. Future ground rent is hence discounted using a percentage value known as the 'Capitalisation Rate'. This rate is determined by the level of the rent due and the area in which the property is located.
- The Leasehold and Freehold Reform Bill proposes to cap ground rents at 0.1% freehold value at the point of valuation (hence £100 for a flat worth £100,000 with freehold-share). The Capitalisation Rate will also be fixed by subsequent regulations, and reviewed by the Secretary of State every ten years. It is currently unclear whether rate fixing will increase or decrease the cost of lease extension.
The Years Remaining on the Lease
- At the end of each lease, ownership of the relevant flat reverts to the freeholder. Once the Leaseholders have purchased the freehold this will no longer happen The Freeholder must hence be compensated for the future loss of the property. This compensation is known as the 'Freehold Reversion'. Compensation is determined by discounting the estimated value of the flats with freehold-share using a percentage value known as the 'Deferment Rate', determined by legal case precedents.
- The Leasehold and Freehold Reform Bill proposes to fix the Deferment Rate by subsequent regulations. The rate will be reviewed by the Secretary of State every ten years. It is currently unclear whether rate fixing will increase or decrease the cost of lease extension.
- If the leases have only a few years remaining, the value of the reversion will be higher. This is because the freeholder expects to receive the flats in the near future and must hence be compensated at a higher level for their loss.
- Banks and Building Societies may not provide mortgages on properties with leases of less than 70 years. This is because the value of the Freehold Reversion increases substantially with time and the property is less of a secure asset for the banks to loan against.
The Value of the Property & Flats
Generally, the more valuable a property and the flats therein, the more a freehold will be worth.
Assessing Property Value
- A valuer may need to consider several different, potential valuations:
- The market value of each flat with current lease.
- The 'no-Act' world values: because of a legal technicality, properties must be valued as if the right to Collective Enfranchisement - provided by the Leasehold Reform Housing and Urban Development Act 1993 (LRHUDA 1993) - does not exist. It would be more difficult to sell flats with shorter leases (generally less than 70 years) without this right. Hence, values of flats with short-remaining leases must be discounted for the purposes of freehold valuation.
- The market values with share-of-freehold.
- When estimating these values a valuer should consider local market data, and where this is insufficient, published graphs of values from historical, negotiated settlements.
- Values determined by previous Tribunal decisions are not normally considered evidential. The Lands Tribunal has indicated that market evidence, agreements and actual analysis are always preferable.
Flat Participation
- When a freehold is sold the freehold owner of all flats in the building will normally change. The premium corresponding to the freehold share of each flat must hence be paid for.
- The premium due for non-participating flats will be split equally between the participating flats. Consequently, the more flats that take part, the lower the price per flat to be paid.
- Valuation of a single freehold-share is generally only carried out where the leaseholders have already bought the freehold, and a flat which did not originally participate decides to participate at a later date.
'Marriage Value' (Participating Flats)
- Once a lease has less than 80 years remaining, legislation stipulates that the increase in the value of the relevant, participating flat caused by freehold acquisition must be shared 50:50 with the current freehold owner. This additional charge is known as 'Marriage Value' and can add significantly to the cost of enfranchisement.
- The relevant increase in flat value is determined by 'Relativity' - the 'no-Act' world value of the property as a percentage of the market value with share-of-freehold.
- The Leasehold and Freehold Reform Bill proposes to abolish Marriage Value entirely.
'Hope Value' (Non-Participating Flats)
- For flats which do not participate in freehold purchase, there remains a hope that those flats may request lease extensions in the future.
- During the freehold sale, the freeholder must be compensated for the loss of any future financial benefit from this hope.
- 'Hope Value' is more flexible than Marriage Value and is traditionally much less than the latter
- The Leasehold and Freehold Reform Bill proposes to abolish Hope Value entirely.
Property Improvements
- Leaseholders participating in freehold purchase can argue that improvements they have made to their properties should be discounted from the property value when calculating the cost of Collective Enfranchisement.
- For example, amounts spent on the addition of a new en-suite bathroom, re-configuration of internal layout to add an extra bedroom or installation of double glazing where it was not present previously may be argued for. Repairs, or like-for-like replacement of existing features, are unlikely to be considered.
Freeholder Retained Parts
- Some freeholds include flats or commercial spaces without assigned long leases. These 'retained parts' are directly owned by the freeholder.
- During statutory freehold purchase the freeholder has the discretionary right to a leaseback on such parts of 999 years at one peppercorn (£0.01) per annum ground rent.
- If the freeholder takes up the discretionary leaseback, the value of the freehold flat will not be included in the freehold acquisition. Post freehold purchase, the previous freehold owner will become a long-leaseholder of the retained part on the lease terms described.
- If the freeholder does not take up the discretionary right to the leaseback, the market value of the retained part will be payable during the acquisition of the freehold. This can make the freehold unaffordable for the leaseholders. It is hence critical that any issues are understood from the outset.
Common Parts & Development Value
- During Collective Enfranchisement leaseholders generally have the right to acquire any property not demised under the leases but which is used in common by the leaseholders.
- When leaseholders acquire parts of a freehold not included in any of the leases, but used in common, these areas are generally valued according to 'Development Value'.
- The freeholder has a right to share in the value of any potential development opportunities arising by virtue of the marriage of leasehold and freehold interests following freehold acquisition by the leaseholders.
- Specifically, the freeholder may argue for a proportion of the projected increase in value to the property less development costs. The most common examples of relevant developments include loft and cellar conversions but may also include construction of new dwellings.
The Location of the Property
Freeholds are generally more expensive in more sought-after areas.
- The location of the property affects the Capitalisation Rate, Deferment Rate and Relativity.
- Properties considered to be in 'Prime Central' London will be the most significantly affected. The boundaries of 'Prime Central' London are, however, somewhat subject to debate.
- The Leasehold and Freehold Reform Bill intends to remove such variables from the calculation.
If you think the cost of Collective Enfranchisement may not be right, and you're unsure about commissioning a Pro-Leagle valuation, then check out our Ballpark Freehold Valuation Calculator intended to give you a very rough idea of how much a freehold will cost.