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The premium to be paid for the new lease, according to Schedule 13, Part II of the Leasehold Reform, Housing and Urban Development Act 1993 (as amended), shall be the total of:
The diminution in the value of the landlord's interest is, effectively:
The compensation is to provide remedy to the landlord for any other diminution in the value of his interest in other property (other flats in the building or the building itself) and any loss or damage arising from the grant of the new lease. It is difficult to find examples of where a landlord could claim compensation since he will, in most cases, retain the freehold. Probably the only possibilities could be a claim for loss of opportunity for redevelopment potential or for a reconversion of a house in flats back to a single dwelling house.
The Act does not require a formal valuation to be carried out but it would be prudent to obtain one. The valuation will provide the basis for the leaseholder's offer to the landlord contained in the Tenant's Notice.
The offer does not need to be the same as the valuation, and there is no legal obligation to reveal the details of the valuation.
The landlord may accept the leaseholder's offer or respond, in his Counter-Notice, with his own asking price. It is to be hoped that the parties will then enter into negotiation and settle the premium. If this cannot be achieved then either party may make application to the Leasehold Valuation Tribunal, in accordance with the set timescales.
The Leasehold Valuation Tribunal will, after hearing the submissions of both parties, determine all outstanding issues relating to the premium:
More information on LVT procedures is contained in our leaflet 'Application to the LVT'.
The legislation requires that the value of the interest to be acquired should be determined in accordance with general market values - assuming a willing vendor and a willing purchaser. The principles of the Act are not to provide a forced bargain for the leaseholder but adequately to compensate the landlord for the diminution in the value of his property - a fair price based as closely as practicable on open market values. The essential difficulty is the assessment of an 'open market value' in the artificial situation created by the imposition of the leaseholder's rights.
Homebuyers who rely on a mortgage valuation report commissioned by their lender, rather than paying more for some form of professional survey, often find they have been ‘penny wise but pound foolish’. That is the main conclusion of analysis of more than 1,000 property purchasers where a quarter of those who relied solely on mortgage valuations needed unexpected building work after completion, at an average cost of more than £1,800.
Cynics may say the conclusion is no surprise when you consider that this report was commissioned by the Royal Institution of Chartered Surveyors(RICS). After all, you wouldn’t ask a barber if you needed a haircut, would you? Against that, the sums of money involved in buying a home make the argument for expert advice compelling. When you are about to sign a contractual commitment to spend several years’ gross earnings, why blind yourself to some of the risks involved and strip yourself of valuable insurance for the price of a week or two’s wages?
Many homebuyers have no idea how little they will get when they settle for a valuation report – or how much they might be able to knock off the asking price, particularly in a weak market where house prices are falling, when they are armed with a survey setting out the property’s faults and any work that needs to be done.
For example, RICS found that nearly six in 10 homebuyers wrongly imagined that a valuation report included an assessment of the
building’s condition, including searching for damp and structural movement. One in three mistakenly believed it included advice on legal issues that a solicitor should investigate.
For important information like this, you have to pay for a building survey or – at bare minimum – a homebuyers’ report. Rosemary Rogers, a director of property experts reallymoving.com, explained: “As a general rule, a homebuyer's report is usually sufficient for homes less than 50 years old and in a good state of repair. It uses a standard format and will include a valuation. A building survey, on the other hand, will be a more in-depth examination of a building's structure and is recommended for older, dilapidated or
"Neither need be expensive. In fact, the average cost of a survey has dropped by almost 25 per cent in the last 10 years, with a homebuyers' report costing £342 on average or £423 for a building survey."
That’s a small price to pay for valuable insurance – as Ed Mead, a director of estate agents Douglas & Gordon, points out: "The main reason to get a survey is that if anything does go wrong, you have a comeback on the surveyor via their professional indemnity. Don't go with a lender's recommendation, always stay independent."
Giles Cook, a director of estate agents Chesterton Humberts, warns against false economies: "Having a property surveyed will help prospective owners avoid nightmare situations that can rack up enormous costs in future.
"There are rarely instances where a homebuyers report might suffice, as – even if you are buying an apartment above ground floor level and below the top floor – you will be responsible for contributing to repairs to the outer fabric of the building. It's essential to check that a sinking fund is in place for any apartment building, especially if the survey highlights repairs are needed
"Expect the worst from a survey, as it will always provide a critical report and find fault wherever possible; that is what surveyors are paid to do. Many of the findings will be suggestions and will list repairs that are not necessarily urgent. However, homebuyers should always seek a second opinion where aspects of the report are worrying, one that corresponds with the problem it addresses, for example a damp specialist or electrician."
Even bad news can be good news for purchasers who are well-informed before completion. RICS reckons three quarters of homebuyers who paid for a building survey were able to negotiate a lower price. Information is power when it comes to property – particularly in a buyers' market when vendors are increasingly vulnerable to haggling.