OF LEASES – INTERNATIONAL NOTE
International Valuation Standards (IVS) General Valuation Concepts
and Principles distinguish between real estate, the physical
tangible “thing” (see Concepts/ Principles 3.0), and real
property which pertains to the rights, interests, and benefits
related to the ownership of real estate. Lease interests are a
form of real property, arising from the contractual relationship (the
terms of which are conveyed by a lease) between a lessor,
one who owns the property leased to another, and
lessee, or tenant, one who typically receives a non-permanent
right to use the leased property in return for rental payments, or
To avoid misunderstandings or misrepresentations, Valuers and users
of valuation services should recognise the important distinction
between the physical and the legal issues involved in considering
value of lease interests.
1.3 This class of ownership is, as for the fee simple or freehold
interest, common to all types of property assets valued. A piece of
real estate may comprise one or more property interests, each of which
will have a Market Value providing it is capable of being
In no circumstances is it considered proper to value different
property interests in the same piece of real estate separately
and then to aggregate their values as an indication of the real
estate’s total value.
contracts establish unique legal estates that are different from fee
simple, or freehold, ownership.
1. 5 International Financial Reporting Standards (IFRSs) (including
International Accounting Standards (IASs)) contain specific accounting
requirements for property that is either held under a lease, or subject
to a lease.
1.6 The relationships between different legal interests in the same
property can be complex and can be made more confusing by the different
terminology used to describe the various interests. This Guidance Note
(GN) seeks to address and clarify these issues.
2.1 This GN sets out definitions, principles, and important
considerations in the valuation of and related reporting for lease
2.2 This GN is to be applied with particular reference to IVS Concepts
and Principles and to IVS 1 and 2, and IVA 1 and 2.
2.3 This GN applies in States where a lessee holds an interest in land
and/or buildings, which is regarded as a separate legal estate. A lease
interest is subordinate to a superior interest, which itself may be
either another lease interest for a longer term or the ultimate fee
simple, or freehold, interest.
basic to the definition and valuation of legal interests include the
Freehold Interest. A fee simple estate, representing the
perpetual ownership in land.
Lease. A contract arrangement in which rights of use and
possession are conveyed from a property’s title owner (called the
landlord, or lessor) in return for a promise by another (called a
to pay rents as prescribed by the lease. In practice the rights and
the duties of the parties can be complex, and are dependent on the
terms of their contract.
Lessor Interest. The interest held by the lessor in any of the
circumstances set out in para. 3.1.5, 3.1.6, or 3.1.7 below.
Lease Interest, also known as Lessee Interest, Tenant’s
Interest, or Leasehold Estate. The ownership interest
is created by the terms of a lease rather than the underlying rights
of real estate ownership. The lease interest is subject to the terms
of a specific lease arrangement, expires within a specified time, and
may be capable of subdivision, or subleasing to other parties.
Freehold subject to Lease Interest/s, has the same meaning as
Leased Fee Interest, representing the ownership interest of a lessor
owning real estate that is subject to (a) lease(s) to others.
Headlease, or Master Lease. A lease to a single entity
that is intended to be the holder of subsequent leases to sublessees
that will be the tenants in possession of the leased premises.
Headleasehold Interest has the same meaning as Sandwich Lessor
Interest. The holder of a headlease or master lease.
Ground Lease. Usually a long-term lease of land with the lessee
permitted to improve or build on the land and to enjoy those benefits
for the term of the lease.
3.1.9 Rent Types
Market Rent. The estimated amount for which a property, or space
within a property, should lease on the date of valuation between a
willing lessor and a willing lessee on appropriate lease terms in an
arm’s-length transaction, after proper marketing wherein the
parties had each acted knowledgeably, prudently, and without
Market Rent is provided, the “appropriate lease terms”
which it reflects should also be stated.
Contract Rent, or Passing Rent. The rent specified by a
given lease arrangement; although a given contract rent may equate to
the Market Rent, in practice they may differ substantially,
older leases with fixed rental terms.
Turnover Rent, or Participation Rent. Any form of lease
rental arrangement in which the lessor receives a form of rental that
is based on the earnings of the lessee. Percentage rent is an example
of a turnover rent.
3.1.10 Marriage Value, or Merged Interests Value. The
excess value, if any, produced by a merging of two or more interests in
a property, over-and-above the sum of the values of those individual
3.1.11 Sale and Leaseback. A simultaneous sale of real estate and
lease of the same property to the seller. The buyer becomes the lessor,
or landlord, and the seller becomes the lessee, or tenant. Because
there may be unique circumstances or relationships between the parties,
sale and leaseback transactions may or may not involve typical market
Relationship to Accounting Standards
Leased property is accounted for differently from freehold property,
plant and equipment under IFRSs/IASs.The valuation requirements are
in IVA 1 and Addendum A to IVA 1.
5.1 Lease interests are valued on the same general principles as
freeholds, but with recognition of the differences created by the lease
contract encumbering the freehold interest, which may cause the
interest to be unmarketable or restricted.
5.2 Lease interests, in particular, are often subject to restrictive
covenants or alienation provisions.
5.3 Freeholds subject to an operating lease are for accounting
purposes generally considered investment property, and as such
are valued on the basis of Market Value. Head leasehold
interests are also commonly valued on the basis of Market Value.
In some States a lessee may have a statutory right to purchase the
lessor’s interest, usually the freehold, or may have an absolute or
right to a renewal of the lease for a term of years. The Valuer
should draw attention to the existence of statutory rights and
the Valuation Report or Certificate whether or not regard has been
paid to them.
The importance of the distinction between the physical matter and the
legal interest in it is critical to valuation. For example, a lease
that the lessee has no right to sell or transfer the leasehold
interest, causing it to be unmarketable during the term of the lease.
to the lessee, therefore, lies solely in the rights of use and
occupancy. The leasehold value may be expressed in monetary terms but
is not a Market Value as the interest cannot be sold in the
market. However, the lessor’s interest (leased fee value) does have
a Market Value, based on the value of the rental income during
the lease together with any residual value remaining at the end of
Each legal interest in a property shall be valued as a separate
entity and not treated as though merged with another interest. Any
calculation of merged interests value or marriage value
should be referred to in supplementary advice only and may be
undertaken as a valuation based on specific assumptions only and
where the Valuer’s Report is appropriately qualified.
Onerous lease covenants may adversely affect the Market Value of
a lease interest. The Valuer must draw attention in the Valuation
existence of such circumstances. The most common situation where this
adverse effect arises involves restrictions on assignment, or on the
Where a property is subject to a lease or tenancy agreement
between two companies in the same group, it is acceptable to take
account of the existence of that agreement, providing the
relationship between the parties is disclosed in the report, and that
the agreement is on arm’s-length terms in accordance with normal
commercial practice. When the valuation is being undertaken for
inclusion in a financial statement, it is acceptable to reflect any
the interests of one of the parties to the lease are being valued.
However, if the interest of the group is being valued for inclusion
in its consolidated accounts, the existence of any inter-company
leases should be disregarded. (International Accounting Standard 40,
When valuing any property interest that is subject to a lease, it
is important that Valuers establish whether any alterations or
been made to the property by the lessee. If so the following
questions need to be addressed:
has the lessee complied with any lease conditions or restrictions
relating to the alterations?
what is the impact of any state laws on the rights of the parties in
relation to the alterations?
the alterations obligatory or voluntary? (see below)
c) is there any obligation on the lessor to compensate the lessee for
the cost or value of the work, or on the lessee to remove the
alterations at the lease end?
Leasehold alterations fall into two main categories:
Obligatory alterations: These usually arise where a property
is leased in a basic state or constructed to a “shell”
specification that is not suitable for occupation without the lessee
undertaking further building or fitting-out work. The lease will
often impose a condition that such work be carried out by the lessee
within a certain timescale
Voluntary alterations:Typically these arise where a property
is leased in a completed state ready for immediate occupation, but
where the lessee elects to undertake work to improve or adapt the
accommodation to suit the lessee’s own particular requirements.
the tenant may regard these as alterations, the general market may
Obligatory alterations will usually have a beneficial impact on
the Market Rent. Voluntary alterations may have a beneficial,
effect on the Market Rent, depending upon their nature and
degree of specialisation.
degree to which the impact on the Market Rent is reflected in
the value of either the lessor’s or the lessee’s interest will
depend upon the
to the questions in 5.9.1.
Negative Market Values
5.10.1 Where lease interests are liabilities to an undertaking, they
may have a negative Market Value.
to the relative complexity of lease interest valuations, it is
essential that the client or the client’s legal advisor provide the
Valuer with either
of all the leases or, for multitenanted property, typical sample
leases together with a summary of lease terms on the other leases.
This International Valuation Guidance Note became effective 31