Lease Extension: Assessing Comparables, Adjustments and Value of 1993 Act Rights in Valuation of a Lease Extension (Daejan Investments Ltd v Nigel and another – 2024)

Where a tenant is to pay a sum to a landlord for an extended lease, this case assesses how the value should be determined, including consideration of comparables and adjustments, and value of rights under the Leasehold Reform, Housing and Urban Development Act 1993 (the “1993 Act”).

The background

In Daejan Investments Ltd v Nigel and another [2024], the subject property was a first-floor flat contained in a 6-storey building, let on a 177-year lease. The lease term was calculated from 25 December 1898, and the lease was granted on 28 January 1985. The respondent leaseholders purchased the lease in 2021.

An extension to the lease had been sought by the leaseholders from the appellant head lessee, the terms of which had been agreed. The valuation of the lease extension was disputed, and the Upper Tribunal was asked to hear an appeal from the First-tier Tribunal as to the premium to be paid for the extension.

The decision

The Upper Tribunal considered two issues:

1. Comparables and adjustments; and
2. Relativity and value of rights under the 1993 Act.

The UT considered the freehold value of the property with vacant possession (“FHVP”), a key factor in calculating the lease extension premium and agreed by valuers to be worth 99% of the freehold. The values of the sale of 5 comparable units were referred to, some of which were in similar blocks in the vicinity of the subject property.

The Tribunal was then required to take the comparable sale values and make adjustments so as the properties were equal to the subject property for the purposes of comparison, identifying material differences which impacted upon the valuation and making adjustments accordingly.

Adjustments were made to the £/sq ft values, allowing for changes in market conditions since the sales of the comparable units. Following an initial dispute as to the appropriate index to apply, the UK House Price Index was settled upon and applied to the comparables and the subject property.

Taking into account a number of devaluations and adjustments, the UT arrived at a FHVP of £940 per sq ft.

The UT then moved on to consider the value of 1993 Act rights. The UT referred to Sinclair Gardens Investments (Kensington) Ltd [2017], in which the Tribunal listed the discounts applied in cases at that time where leases had unexpired terms of 40 or more years. The list made a useful reference point for leases with different unexpired terms, supporting a consistent and straightforward approach.

In the present case, the UT again supported this approach, adopting a figure of 5.85% in line with the unexpired term of the lease. The evidence presented in respect of the market was found to be reliable, referring to a property sold recently, and the Tribunal could therefore apply the value of Act rights to the market value of the subject property and make relevant date adjustments. In this case, the UT found no reason to compare the value to relativity graphs; these were required only in a ‘cross-checking’ exercise where market evidence was less reliable.

Advice and action for landlords

This Upper Tribunal decision supports the popular approach set down in the Sinclair Gardens Investments case, finding that where reliable market evidence is presented, relativity graphs needed only to be referenced as a ‘cross-check’ exercise.

The freehold value of the flat with vacant possession was found by the UT to be slightly higher than the figure arrived at following devaluations, owing to the market conditions and evidence presented.

This decision is a helpful reference point for lease extension valuations under the 1993 Act, setting down useful guidance and consolidating the Sinclair Gardens approach.