At RES Property Surveyors, we are experts in loft valuations. Loft valuations usually occur, or are necessitated, by one of two routes, the first is as part of a 1993 Act enfranchisement claim and the second is as part of a commercial deal where a top floor leaseholder (usually) looks to acquire the loft space from the freeholder.
The purchase of the loft space usually requires two elements, one is a Deed of Variation, which effectively demises the loft space to the leaseholder and the second requirement, which is often overlooked, is the provision of a Licence to Alter, which is the legal document or licence which allows the actual development works. A leaseholder needs both in order to affect the conversion of the loft space.
The syntax and mechanics of a loft valuation comprise what is known as a ‘Residual Valuation’. That is to say that the Gross Development Value (GDV) is first established, which is the value the loft conversion adds to the demise. This is often calculated on a £/per sq ft rate and is usually, due to quantum, less than the £/per sq ft rate on the main accommodation.
The valuation may also look at this on a global valuation basis and compare the completed property value with that with local properties which have been sold with loft conversions/ dormers in situ.
From this figure, we deduct the costs of realisation, which principally includes the build costs, finance and further items such as preliminaries and professional fees.
Once these costs have been deducted, you get to a net profit figure. This figure is then divided or apportioned between the freeholder and leaseholder. The level of split on this apportionment is effectively a commercial deal, but RES Property Surveyors are generally guided by two principal ratios, one is statutory legislation and guides the value to a 50.00% split (the 1993 Act marriage value measure) and the second is a well-known property case known as Stokes -v- Cambridge, which guides the value to a third of profit (33.00%) and this was a ransom strip case.
At RES Property Surveyors, we like to determine the respective negotiating positions of the parties and decide on a profit split within these parameters. The profit split is absolutely crucial as it is a main factor in determining what a leaseholder will pay, or what a freeholder will get. Each case should be considered on its merits in terms of the split and this comes down to valuer judgement, and this is where the experts at RES Property Surveyors come in.
Fundamentally, the freeholder is getting a windfall and there is only one purchaser in the market for the loft space that being the top floor flat owner. Obviously, this is not necessarily always the case, but in a simple period conversion, it almost certainly will be. Therefore, if the leaseholder does not progress, then the freeholder will have to wait for the chance to monetise the loft space again at some future point and the opportunity cost of its capital will be lost. The leaseholder also takes the development risk.
Conversely, the freeholder is not compelled to sell the loft space and therefore holds a strong hand. The balance of the negotiation is often delicate, and we would happily discuss any cases with either freeholders or leaseholders. RES can also undertake the Licence to Alter elements as part of the instruction.
The parties should also remember that the block insurance or building insurance policy will need to be re-based with a fresh Insurance Reinstatement Cost Assessment as the floor area of the building will have been increased post acquisition.