What is a Premium?
In a statutory lease extension under the Leasehold Reform, Housing and Urban Development Act 1993, the premium is the lump-sum amount you pay to your landlord (the freeholder) to extend your lease. It reflects the value of what the landlord is giving up: future ground rent, eventual possession of the flat, and in some cases, a share of the increase in the flat’s value.
Why Do You Have to Pay a Premium?
When you extend your lease, two things happen:
- Your ground rent drops to a peppercorn (i.e. effectively zero)
- You gain an additional 90 years on top of your current lease term
This means the landlord loses rental income and has to wait longer before they get the property back. The law says they should be fairly compensated for this, and that compensation is what we call the premium.
What Is the Premium Made Up Of?
The premium is made up of three key parts:
1. The Landlord’s Loss of Ground Rent
The landlord was expecting to receive ground rent each year for the rest of your original lease. But once you extend the lease, that rent disappears. The law says you need to pay them a lump sum equivalent to the value of that lost income.
Example: If you were paying £100 a year in ground rent for the next 30 years, and an investor would typically want a 6% return, the value of that lost income is about £1,300. That amount becomes part of your premium.
2. The Landlord’s Loss of Reversion
Eventually, at the end of your lease, the landlord is entitled to get the flat back. That’s called the "reversion." If you extend your lease by 90 years, they have to wait much longer to regain ownership.
To calculate this loss, valuers look at how much the flat would be worth when the landlord eventually gets it back, then apply a discount to reflect how far into the future that is.
Example: If the flat would be worth £165,000 in today’s money, and the landlord was going to get it back in 68 years, the present value might be about £6,000. But if they only get it back in 158 years, that same £165,000 might only be worth £70 today. That £5,930 difference is added to the premium.
3. Marriage Value
When your lease gets extended, the value of your flat goes up – often significantly, especially if the lease is short. That increase in value only happens because the landlord is legally required to give you a longer lease. The law says that increase (called the "marriage value") should be split 50/50 between you and the landlord.
Important: Marriage value is only charged if your lease has less than 80 years remaining.
Example: If your flat is worth £200,000 now and £220,000 after the extension, the increase is £20,000. The landlord gets 50% of that – so £10,000 is added to your premium.
What Affects the Size of the Premium?
Several factors influence how much you’ll have to pay:
- Length of your current lease: The shorter your lease, the higher the premium – especially if it's under 80 years.
- Ground rent amount: Higher ground rent means more compensation for the landlord.
- Reversion timing: The sooner the landlord expected to get the flat back, the more value they’re losing.
- Deferment rate: This is the discount rate applied to the landlord’s reversion value. A lower rate = a higher premium.
- Capitalisation rate: This is the rate used to value lost ground rent. Again, a lower rate = a higher premium.
- Property value increase: A bigger jump in value from extending the lease means more marriage value, which increases the premium.
Summary
The premium you pay to extend your lease is made up of the landlord’s lost rent, delayed reversion, and – if under 80 years – a share of the increase in the flat’s value. It’s often the most important figure in a lease extension, and even small changes in how it’s calculated can make a big difference to the cost.
