REVERSIONARY VALUE

When we value a property by rental method, in cases of terminable interest, we may have to resort to the reversionary value of the land. There is lot of confusion amongst the valuers about validity and existence of this concept due to misconception of basic fundamentals. The reasons for this confusion is the Calcutta High Court’s judgment in the Smt. Ashima Sinha’s Case, where in the High Court has been mislead.

The Concept of Leasehold properties does not create much confusion in valuation of the property. However, when freehold property is developed by landlord himself, this concept creates confusion. When the land owner constructs a building on the land belonging to him and lets out premises to the individual tenants, he receives rent from the tenants which is based on investment in land as well as investment in the building. Now the property may be in an area where the rent Control Act. May be applicable or in area where such act is not applicable but Transfer of Property Act is applicable.

In the former case, the owner will never get back his land because tenants of the building are protected under the Rent Act against eviction and their tenancy rights are perpetual in nature. These rights continue even after the collapse of the building. There is absolute no possibility of reversion of open or vacant land back to the land owner till existence of rent Act. Obviously in such a case there is no reversion of land to the land lord and valuer cannot and should not add any value on account of the reversionary value of land i.e. land value receivable after future life of the structure. In such a case, only capitalized value of rent in perpetuity would give correct market value of the property.

Alternatively, if the Rent Control Act is not applicable to the property but Transfer of the property Act is applicable to the property, then the owner can very well eject the lessee of premises in accordance with lease terms. There is no right of lessee after collapse of the building. On expiry of total life of the building also the owner can evict all the Lessees (Tenants) in the building and demolish the building for erection of the new building on the open plot. In such a case, there is an established reversion of land to the land owner. Owner of the property, in such a case, during existence of the old building on the plot, holds two types of clear and districts rights in the property. First right is to receive rental income from the property (Revenue income from land and building) till future life of the building. Second right is to receive back land (Capital income in future) with vacant old building, on expiry of future life of the building. The value of this second right is called Reversionary value of the land.

Alternatively, if the Rent Control Act is not applicable to the property but Transfer of the property Act is applicable to the property, then the owner can very well eject the lessee of premises in accordance with lease terms. There is no right of lessee after collapse of the building. On expiry of total life of the building also the owner can evict all the Lessees (Tenants) in the building and demolish the building for erection of the new building on the open plot. In such a case, there is an established reversion of land to the land owner. Owner of the property, in such a case, during existence of the old building on the plot,holds two types of clear and districts rights in the property. First right is to receive rental income from the property (Revenue income from land and building) till future life of the building. Second right is to receive back land (Capital income in future) with vacant old building, on expiry of future life of the building. The value of this second right is called Reversionary value of the land.

Example:

A Lessor leased his land (Area 2500 Sq.Mts.) for 40 years period for a rent of Rs.10,000/Month. Lessee constructed house yielding rent of Rs.40,000 per month. Lease condition states that on maturity of lease, Lessee shall remove the structure and return open land to Lessor. Unexpired period of lease as on today is 10 years. Expected yield on investment is 8%. Land rate prevalent in locality as on today is Rs.3500/Sq.mt. Rent Control Act is not applicable. Advice on fair price for purchasing Lessor’s interest.

Solution –

Lessors hold two rights.