Deferment Rate Leasehold Enfranchisement | Ground Rent Valuation

deferment rate leasehold enfranchisement

Generally a ‘deferment rate’ may be defined as “the rate of return that is used to defer or ‘discount’ a future value to arrive at the present value”. For example, if a property is estimated to have a capital value (at today’s prices) of £1,000,000 in five years, then its present value may be assessed as £1,000,000 × {1/[(1 + 0.08)5]} = £567,400, where 0.08 or 8% is the deferment rate, i.e. the price is ‘adjusted’ or ‘deferred’ at a compound rate 8% per annum for five years” Encyclopedia of Real Estate Terms, Third Edition.

However, the England and Wales for the specific purpose of collective leasehold enfranchisement, the court have applied a more dogmatic approach to determining such a capitalisation rate for long-term ground rents.

deferment rate leasehold enfranchisement

‘Deferment rate’ is applied specifically to the valuation of property for the purpose of leasehold enfranchisement. “[T]he annual discount applied, on a compound rate, to an anticipated future receipt (assessed at current prices) to arrive at its market value at an earlier date [that is to say the valuation date]”, Earl of Cadogan v Sportelli [2007] 1 EGLR 153, para. 2 (LT), [2008] 1 WLR 2142, 2147 (CA). In this case it was decided that when valuing the reversionary value of a property being acquired in accordance with the Leasehold Reform Acts, the deferment rate for collective leasehold enfranchisement should be 5% for flats and 4.75% for houses. This was based on a ‘composite rate’ of:

‘risk-free rate’ (RFR)                               2.25%

plus, ‘equity-risk rate’deferment rate leasehold enfranchisement

 or ‘risk premium’ (RP)                            4.5%

less, ‘capital-growth rate’

or ‘real-growth rate’ (RGR)                   2.0%

composite rate  (deferment rate)      4.75%

The ‘risk-free rate’ is based on the initial rate on index-linked gilts, the ‘real-growth rate’ is based on the project long-term growth rate in house prices at the date of the valuation, and the risk premium reflects the risk factors applicable to long-term reversionary residential reversionary investments (e.g. liquidity, deterioration and volatility).

This ‘composite rate’ is then increased by 0.25% for flats.

However, Sportelli was applied to houses in the prime residential area of Belgravia and Kensington, London. These rates may be less applicable to areas where property investment is riskier, growth rates are lower or the properties have a higher risk of deterioration in value (Zuckerman v Trustees of the Calthorpe Estates [2009] UKUT 235, [2009] PLSCS 331 (UT)—adopting a rate of 6%).

In effect this is a capitalisation rate, or years’ purchase for a period of time, so that if a ground rent of £100 p.a. is receivable for 75 years, the capital value at a ‘deferred rate’ of 4.75% is £20,400 {1000 × (YP for 75 years at 4.75% or 20.404)}.

deferment rate leasehold enfranchisement shorter leases

In the case of a lease that has less that 20 years to run, the court still considers that the composite rate of 4.75% or 5.00% as applicable, although it may be appropriate to adjust the ‘growth rate’ based on the stage of the “property cycle” (Earl of Cadogan v Sportelli [2010] UKUT 427 (LC), [2007] 1 EGLR 155, confirmed by Earl of Cadogan v Sportelli [2008] UKHL 71, [2009] 1 EGLR 153 (HL)).

If there is a short period to run (e.g. 5 years or less), this rate is generally not appropriate and the capital value on reversion is deferred at a more appropriate market rate (Trustees of Sloane Stanley Estate v Charles Carey-Morgan [2011] UKUT 415, [2011] 47 EG 104 (UT), confirmed by Carey-Morgan v Trustees of Sloane Stanley Estate [2012] EWCA Civ 1181, [2012] 48 EG 64 (CA)).  See also discount rate, hardcore method(BrE), term and reversion method(BrE).

Bibliographical references for Deferment Rate Leasehold Enfranchisement:

T. Curran. Buying your FREEHOLD and extending your LEASE (London: 1993) (deferment rate leasehold enfranchisement).
R. Hayward. Valuation: Principles into Practice (6th ed. London: 2007), Ch. 3 ‘deferment rate Leasehold Enfranchisement’.
A. Riley et al. Advanced Property (Legal Practice Course) (Bristol: 1999), pp. 377–91
T.M. Aldridge. Leasehold Law (London: Loose-leaf), §§ 8.045A—8.095. 27(3)
Halsbury’s Laws of England, Landlord and Tenant (4th ed. Reissue), §§ 1552—1670.
Hague on Leasehold Enfranchisement (5th ed. London: 2009) (deferment rate leasehold enfranchisement).

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Terms in bold including deferment rate leasehold enfranchisementdiscount ratehardcore method(BrE)term and reversion method(BrE) are all defined and explained in detail, with more references, in Real Estate Definitions Online.

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Read all about the deferment rate leasehold enfranchisement and other leasehold valuation issues, with multiple cross references, in Real Estate Defined.

(Deferment Rate Leasehold Enfranchisement)

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