A life tenancy refers to a legal interest in a property granted to an individual for the duration of their lifetime. Valuing a property that includes a life tenancy can present a number of unique legal and financial challenges with wide-reaching implications.
What is a Life Tenancy?
In the world of property valuations, one of the important tasks is to check the title and confirm ownership. The most secure and comprehensive form of land ownership in Australia is freehold tenure, also known as "an estate in fee simple". Typically, property titles in Australia will show a first schedule, which notes the ownership of the property, and a second schedule, which notes any encumbrances on the title. Common encumbrances include mortgages, easements, right of carriageway, covenants and caveats. However, one type of encumbrance that is rarely seen, but does show up from time to time, is a Life Tenancy.
A life tenancy refers to a legal interest in a property granted to an individual for the duration of their lifetime. Legally, a person who is granted a life estate or life interest, is known as a life tenant. This interest allows the grantee the right to occupy and use the property until they pass away. After their death, the property reverts to the registered owner or passes to a reversionary interest holder. Life tenancy agreements are legally binding contracts which usually include specific terms and conditions, although some may be more detailed agreements than others. The tenant has the right to use the property without interference although usually has an obligation to maintain the property and pay for any repairs or maintenance.
Financial Obligations and Terms of Life Tenancy
Typically, a life tenancy is granted either without any rental obligation or a predetermined rental (usually below market), although paying rates, taxes and insurance will generally be an obligation of the grantee for the duration of the tenancy. Acumentis has undertaken several valuation assignments over the last few years involving a life tenancy, which have varied from part occupancy of a residential property to full occupancy of a residence plus curtilage on a rural property.
Valuing Properties with Life Tenancies
Valuing a property that includes a life tenancy can present unique challenges. Properties rarely sell with an existing life tenancy, which limits the availability of comparable sales data. In these cases, we proceed with valuations based on the assumption that a property is sold with vacant possession.
With this type of arrangement in place, our inhouse procedure is to consider the income that is lost during the term of the life tenancy and treat this as a deduction from the freehold value. The term of the life tenancy must be calculated based on the tenants likely remaining lifespan, which will obviously vary from person to person. We believe the only way to do this calculation is to adopt ABS Statistics based on the average lifespan for men and women. We perform these calculations to determine the total loss of value over a life tenancy.
Acumentis is recognised as an authority in handling complex property valuations, including those involving life tenancies. Our team is well equipped to navigate the intricacies of these arrangements and provide thorough, accurate assessments.