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function calculatePremium() {
// 1. Get Inputs
var valLong = parseFloat(document.getElementById("longLeaseValue").value);
var valShort = parseFloat(document.getElementById("shortLeaseValue").value);
var groundRent = parseFloat(document.getElementById("groundRent").value);
var years = parseFloat(document.getElementById("yearsRemaining").value);
var defRate = parseFloat(document.getElementById("defermentRate").value);
var capRate = parseFloat(document.getElementById("capRate").value);
// 2. Validation
if (isNaN(valLong) || isNaN(valShort) || isNaN(years) || isNaN(defRate) || isNaN(capRate)) {
alert("Please fill in all required fields with valid numbers.");
return;
}
if (isNaN(groundRent)) groundRent = 0;
// Convert percentages to decimals
var rDef = defRate / 100;
var rCap = capRate / 100;
// 3. Calculation Logic
// Term 1: Capitalisation of Ground Rent (Loss of income stream)
// Formula: Rent * ((1 – (1+r)^-n) / r)
var yearsPurchase = (1 – Math.pow(1 + rCap, -years)) / rCap;
var term1_GroundRent = groundRent * yearsPurchase;
// Term 2: Reversion to Freehold (Deferment)
// Formula: Long Lease Value / (1 + DefermentRate)^Years
// Note: We deduct the value of the reversion AFTER the extension (Years + 90), but this is usually negligible.
// For standard statutory estimates, we look at the PV of the freehold now.
var pvFreehold = valLong / Math.pow(1 + rDef, years);
// The landlord loses the PV of the freehold.
var term2_Reversion = pvFreehold;
// Total Freeholder's Interest (Diminution in Value)
var freeholderValue = term1_GroundRent + term2_Reversion;
// Term 3: Marriage Value
// Only applicable if lease is less than 80 years
var marriageValue = 0;
var landlordShareMarriage = 0;
if (years < 80) {
// Marriage Value = (Value of Extended Lease) – (Value of Existing Lease + Landlord's Interest)
// Ideally: (Value of Tenant's Interest Proposed + Value of Landlord's Interest Proposed) – (Value of Tenant's Interest Existing + Value of Landlord's Interest Existing)
// Simplified: Long Value – (Short Value + Freeholder Value calculated above)
var totalExistingValue = valShort + freeholderValue;
marriageValue = valLong – totalExistingValue;
if (marriageValue = 80) {
shareText = "N/A (>80 years)";
}
document.getElementById("marriageValShare").innerHTML = shareText;
document.getElementById("result-container").style.display = "block";
}
Understanding the Discount Rate in Lease Extensions
When extending a residential lease under the Leasehold Reform, Housing and Urban Development Act 1993, the premium you pay is derived from a complex set of actuarial calculations. One of the most critical, yet often misunderstood, variables in this calculation is the Discount Rate, formally known in this context as the Deferment Rate.
What is the Deferment Rate?
The Deferment Rate is the annual percentage rate used to calculate the present value of a future asset. In the context of a lease extension, the freeholder owns the asset (the property), but they cannot access it fully until the lease expires. The "reversionary value" is what that property will be worth in the future, discounted back to today's money.
Essentially, it answers the question: "How much is the right to possess this property in X years worth today?"
The "Sportelli" Rate
Unlike commercial discount rates which fluctuate with the market, leasehold valuation tribunals often rely on case law precedents to set this rate. The landmark case Earl Cadogan v Sportelli (2006) established a generic deferment rate of:
- 5.0% for flats
- 4.75% for houses
While these are the standards, arguments can occasionally be made for different rates based on specific property characteristics or changes in the risk-free rate (gilt yields), though departing from Sportelli is difficult.
How the Rate Affects Your Premium
The Deferment Rate has an inverse relationship with the premium cost:
- Lower Rate: Increases the Present Value of the freeholder's interest, resulting in a higher premium for the leaseholder.
- Higher Rate: Decreases the Present Value, resulting in a lower premium.
For example, if you have 60 years remaining on a flat worth £500,000, shifting the deferment rate from 5% to 4.5% could add thousands of pounds to the reversionary cost component of the premium.
Marriage Value and the 80-Year Rule
The calculator above also accounts for Marriage Value. This is the potential increase in the property's total value arising from the "marriage" of the leaseholder's and freeholder's interests into a longer lease.
Crucially, if your lease has more than 80 years remaining, no marriage value is payable. Once the lease drops below 80 years, the landlord is entitled to 50% of this "profit," significantly increasing the cost of extension. This creates a "cliff edge" in valuation where costs jump dramatically the day the lease drops to 79 years and 364 days.
Accuracy of Estimates
Please note that this tool provides a statutory estimate. Actual premiums can vary based on negotiations regarding the "Relativity" (the ratio of the short lease value to the long lease value), specific ground rent review clauses, and tribunal decisions. Always consult a RICS chartered surveyor for a formal valuation.