How to Calculate Your Lease Extension Premium: Step-by-Step

Learn exactly how the RICS deferment rate method calculates your lease extension premium, with fully worked examples for typical UK properties.

A statutory lease extension premium is not a figure the freeholder simply names. It is calculated under a formula set out in Schedule 13 to the 1993 Act, using three components, a handful of inputs and a few contested judgments. If you understand how it is built you can sense-check a surveyor’s figure, see why short leases cost so much more, and spot where a negotiation can move the number.

The Three Components of the Premium

The lease extension premium is determined by a legal framework established under the Leasehold Reform, Housing and Urban Development Act 1993 and refined by landmark Tribunal cases. The premium has three components added together:

• Ground Rent Capitalisation — the present value of the ground rent the freeholder will lose
• Reversion Value — the freeholder's right to get the property back at lease expiry, discounted to today
• Marriage Value — an additional sum payable only when the lease is under 80 years

Component 1: Ground Rent Capitalisation

Uses the Years' Purchase (YP) formula: YP = (1 minus (1 + r) to the power of minus n) divided by r, where r = 0.05 and n = unexpired lease years.

Component 2: Reversion Value

At the end of your current lease the freeholder would get the flat back. An extension of 90 years pushes that day further away, so the freeholder is compensated for the delay. The reversion is the freehold value discounted to today at the deferment rate for the remaining term, minus the same value discounted over the extended term:

Reversion = FV ÷ (1 + r)ⁿ − FV ÷ (1 + r)^{n + 90}, with r = 5% (the deferment rate set for flats in Sportelli, 2007) and n = unexpired years. The second term is tiny for any realistic lease, so in practice the reversion is close to the freehold value divided by 1.05ⁿ. Note that relativity is not part of this component: it comes in when we value your existing lease for marriage value.

Component 3: Marriage Value (80 years or fewer remaining)

Marriage value is the extra value released when the leasehold and freehold interests are combined by the extension. It is only payable when the unexpired term is 80 years or fewer. It is measured as:

Marriage value = (extended lease value + freeholder's interest after extension) − (current lease value + capitalised ground rent + freeholder's current reversion)

The freeholder receives 50% of that figure. To value your current lease we need a relativity: the percentage of the freehold value that a lease of your length is worth. We use the Gerald Eve 2016 relativity table, interpolated between its published points (for example 83.6% at 68 years, 70.5% at 50 years and 51.1% at 30 years). The extended lease (unexpired term plus 90 years) is valued at roughly 98–98.5% of freehold value. Tribunals since Sloane Stanley Estate v Mundy (2016) prefer real-world evidence of comparable sales, so a surveyor's chosen relativity can differ.

What You Need to Know to Work It Out

• Freehold (vacant possession) value: what the flat would be worth with a very long lease and no ground rent. If you only know the value with your current lease, divide it by the relativity for your lease length to estimate the long-lease value (a flat worth £292,700 with 68 years left is worth about £350,000 on the Gerald Eve table at 83.6%).
• Unexpired term: the years left on the valuation date, which is the date your section 42 notice is served.
• Ground rent: the current rent and any scheduled increases. Doubling clauses and RPI-linked reviews can add a lot to the capitalised value.
• Rates: a deferment rate (5% for flats under Sportelli) and a capitalisation rate for the ground rent; valuers often use higher capitalisation rates, 6–7% on higher-value rents, than our calculator’s single 5%.
• Relativity: the percentage of the long-lease value your existing lease is worth, needed only for marriage value.

Assumptions the Statute Builds In

• The valuation assumes the leaseholder has no statutory right to extend (the “no-Act world”), which affects the relativity used.
• Any improvements you made to the flat are disregarded in valuing the existing lease, so you do not pay for them twice.
• The new lease is for the existing term plus 90 years at a peppercorn rent, on otherwise the same terms.
• The valuation date is the date of the notice, not completion, so the lease shortening during the process does not raise the price.

How Sensitive Is the Answer to the Rate?

The 5% rate is a decision of the Lands Tribunal and Court of Appeal in Sportelli, and the government is consulting on prescribing rates. Because a higher rate cuts the reversion but raises marriage value, the net effect is smaller than you might expect. For a £350,000 flat with 68 years left and £300 ground rent, our calculator gives:

The relativity matters more: moving it by three percentage points on a £400,000 flat shifts marriage value by about £6,000 (see relativity tables).

How the Premium Changes With Lease Length

For the same £350,000 flat with £300 ground rent, the premium on our calculator is about £10,200 at 90 years, £11,400 at 85, £20,400 at 80, £32,300 at 70 and £47,600 at 60. The step between 81 and 80 years is marriage value starting; see the 80-year rule.

From Calculation to Negotiation

1. Instruct a RICS valuer (see fees) to value the flat and recommend an opening offer.
2. Serve the section 42 notice with that proposed premium; see our section 42 guide. The freeholder has at least two months to serve a counter-notice with its own figure.
3. Negotiate: surveyors usually exchange evidence and settle somewhere between the two. Most claims settle without a hearing.
4. If not agreed, either party can apply to the First-tier Tribunal between two and six months after the counter-notice; the Tribunal determines the premium and terms.

Common Mistakes

• Using the wrong lease length (it is the term on the notice date, so count from the date you will serve).
• Treating an online estimate as a valuation: it is a starting point and not evidence.
• Forgetting ground rent escalations, which can change the capitalised value a lot.
• Applying relativity to the wrong value: it is a percentage of the long-lease value, not of what the flat sells for today.
• Waiting for reform without pricing the cost of delay; see the 2024 Act.

Professional Fees on Top

Budget an additional £4,000–£8,000 for professional fees: your solicitor (£1,200–£3,500), your surveyor (£750–£2,000), and the freeholder's reasonable costs (£1,500–£4,000 combined) which you are legally obliged to pay. See our full fee breakdown.