Valuations on loft spaces, extensions, vaults and communal areas will often be required where the leaseholder on the top floor plans to extend up into the space but needs to pay a premium to the freeholder.
Loft Spaces
The ownership of the loft space will need to be ascertained. Often, it does not fall into the leaseholder demise. So, ownership is typically retained by the freeholder. If, however, the space is within the demise of the leaseholder, they would need ownership of the roof structure and be without restrictive covenants on development, which you should consult your solicitor about.
A valuation of the property before and after works are carried out will need to be undertaken by a surveyor. The uplift in value is regarded as profit (after costs are deducted). Costs include any alterations to the communal areas or other flats as necessary plus any professional fees (including party wall).
Frequently asked questions
What kind of loft should I develop?
The loft space development could be transformed into an independent apartment or simply expanded as part of the existing upper apartment.
Multiple planning considerations also come into play such as design and access if the loft space is developed as a standalone dwelling. There may be other obstacles to overcome such as Building Regulations requirements, which could significantly impact the costs associated with the development.
A more practical approach could be creating an extension of the upper floor flat rather than creating an entirely separate residence.
Do I apply market value or marriage value?
Market value is defined as “The estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”
As market value concerns the overall value of a property before and after, it does not specify the value of the loft space individually.
Marriage value deals with added value and this is what is applied. It is similar to how a leaseholder will compensate a landlord for granting an extension to their lease term.
What cost adjustments are made in loft space valuations?
The leaseholder of the loftspace takes on all the risks associated with works while the owner of the property takes on almost no risk at all. It would therefore be a mistake to assume that the project goes exactly as planned and so a 10% adjustment on the premium is typically made to account for the possibility of the project exceeding its expected cost. In cases of more complicated projects there may be an even greater discount. The premium for the loft conversion is then paid upfront.
Do we each appoint a surveyor?
Valuations of this nature involve a degree of subjectivity, leading both the leaseholder and freeholder to appoint their own separate surveyors, often engaging in a negotiation. Some freeholders, however, may opt for a more relaxed approach and instruct only one surveyor (Single Joint Expert) and one report for the benefit of both parties. In such cases, it is advisable for the valuer to explicitly state in their terms and conditions that both the leaseholder and freeholder are considered as clients so that the report has an even greater focus on impartiality.
Do you have any valuation examples?
One client was a leaseholder for a first floor flat who wanted to convert his loftspace. He owned a share of the freehold. Architectural plans had been drawn up and a quotation from a contractor received. A valuation of the flats determined that the property would be worth an additional £150,000 upon completion of the works. After deducting professional fees and build costs, the profit was £70,000. 10% deduction was applied to account for risk, as this was a standard project, whereas an increased deduction would be applied for riskier works. As the client owned a share of freehold, the final compensation amount came to, say, £16,000. See below calculation breakdown:
- Existing property value: £600,000
- Proposed value post-works: £750,000
- Uplift: £150,000
Construction costs: £70,000
- Valuer: £2,000
- Planner: £1,000
- Architect/Engineer: £2,000
- Solicitor: £1,000
- Party wall: £3,000
- License to Alter: £1,000
- Total professional fees: £10,000
Profit: £70,000
- Deduct 10% risk on cost-overrun: £63,000
- Sum payable at 50% marriage value: £31,500
- Share of Freehold resulting in halving: £15,750