VALUE OF LESSOR’S INTEREST
Value of Lessor’s interest in land would comprise of following three parts based on rights held by Lessor as per lease terms.
- Capitalised value of lease rent receivable from the Lessee under lease contract, for the unexpired period of lease.
- Present value of the right of reversion of land and building to self (i.e. Lessor) on maturity of lease period.
- Market value of the rights of the Lessor to waive any of the restrictions imposed under lease contract.
In case premium was paid initially, virtual rent may also be required to be considered in working out interest of lessor in the property.
VALUE OF LESSEE’S INTEREST
Value of Lessee’s interest in land would comprise of following two parts
- Capitalised value of profit rental (net rent income receivable from building) for unexpired period of lease. As Lessee’s income is terminable and as he would lose building on maturity of lease period, provision for recoupment of capital invested in building (rate of recoupment) should also be made along with appropriate remunerative rate of interest (duel rate table).
In case the property is not rented but is self-occupied by the lessee for industrial, commercial or residential use, value of lessees right will have to be worked out by calculating depreciated present worth of the structure erected on the plot. However, future life of structure will be co-terminus with the maturity date of the lease and not based on actual physical life of the building.
- If plot is not fully developed and is under- utilised, profit rental or utility value of such unutilised land till the maturity date of lease has to be considered in valuation.
In case initial premium is paid by the lessee then the rental equivalent of the premium is required to be considered to find out lessees interest.
Profit rent = Rack rent-actual ground rent-rental equivalent of premium.
When the profit rent is nil the rental equivalent has to be capitalised for unexpired period of lease to find out the value of Lessee’s interest in the property.