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.
- The capitalized value of lease rent receivable from the Lessee under a lease contract, for the unexpired period of the lease.
- Present value of the right of reversion of land and building to self (i.e. Lessor) on the maturity of lease period.
- The market value of the rights of the Lessor to waive any of the restrictions imposed under the lease contract.
In case premium was paid initially, virtual rent may also be required to be considered in working out the interest of the lessor in the property.
VALUE OF LESSEE’S INTEREST
Value of Lessee’s interest in land would comprise of following two parts
- Capitalized value of profit rental (net rent income receivable from the building) for the unexpired period of the lease. As Lessee’s income is terminable and as he would lose building on the maturity of the lease period, provision for recoupment of capital invested in building (rate of recoupment) should also be made along with the 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, the value of the lessees’ right will have to be worked out by calculating depreciated present worth of the structure erected on the plot. However, the future life of the structure will be co-terminus with the maturity date of the lease and not based on actual physical life of the building.
- If the plot is not fully developed and is under-utilized, profit rental or utility value of such unutilized land till the maturity date of the lease has to be considered in the valuation.
In case the 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 capitalized for the unexpired period of lease to find out the value of Lessee’s interest in the property.