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Chapter 1 - Valuation Terminology

A proper understanding of valuation terminology, and definitions is necessary for any

valuer before taking up valuation assignments. In this chapter we look at some of the
commonly used terms in valuation and their meaning and explanation from the
limited perspective of valuation of assets.

Assets – In the context of valuation, ‘assets’ mean items that might be subject to a
valuation engagement (assignment). Assets can be considered to mean asset, group
of assets, liability, group of liabilities, or group of assets and liabilities.

Types of Assets:
Tangible – Tangible assets are assets that have physical substance i.e. assets that
can be seen and touched. Examples of tangible assets are land, buildings, plant &
equipment, cash, jewellery, Govt. securities, Fixed Deposits etc.

Intangible – Intangible assets are assets that lack physical substance i.e. assets
that cannot be seen or touched. An intangible asset manifests itself by its economic
properties, and even though it does not have physical substance, it grants rights
and/or economic benefits to its owner. Examples of intangible assets are goodwill,
brand recognition, franchises and intellectual properties such as patents,
trademarks, trade names, copy rights etc.

Sub types of tangible assets -

Movable - Movable assets are cash, jewellery, bullion, furniture, movable
machineries and personal belongings.

Immovable - Immovable assets are land, buildings and other improvements

attached to it, embedded plant & machineries etc.
As per The Registration Act 1908, ‘Immovable Property includes land, building,
hereditary allowances, rights to ways, lights, ferries, fisheries, or any other benefit to
arise out of land, and things attached to the earth or permanently fastened to
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anything which is attached to the earth but not standing timber, growing crops or
grass.

Property – It is something tangible or intangible to which its owner has legal title
and which entitles the owner to economic benefit.

Land - Land includes ground, what is below the ground, above the ground and the
airspace. These are also called subsurface (underground), surface and airspace.
When one buys or owns a piece of land it can be construed that one owns what is
under the ground, the ground itself and the space above the ground. However it is
pertinent that the Government owns the air space above the permissible height of
construction and generally right to all the minerals held underground. Even the water
held underground can be used only with Government permission.

Concept of real property, real estate & realty-

In our day to day life the words ‘Realty’, ‘Real Property’ and ‘Real Estate’ are used
interchangeably to mean one. However it is important to understand the difference
between these words.

Realty- It is a broad concept of a sector. Realty or Real Sector includes both Real
estate and Real property.

Real Estate- Real estate is referred more to the physical items such land and
buildings and improvements made thereto. Real Estate means land and all things
that are a natural part of the land, e.g. trees, minerals and things that are attached to
the land such as buildings and site improvements and all permanent building
attachments like mechanical and electrical plant providing services to a building, that
are both below and above the ground.

Real Property- All rights, interests and benefits related to the ownership of real
estate. Thus Real Estate is part of Real Property.
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The major interests in real property are freehold interest and leasehold interest. A
freeholder (which is the highest form of ownership) has many rights. He can
possess, enjoy, occupy, construct (sometimes demolish) and when he so desires,
sell the property. Freeholder can also create lesser rights in his property by giving
right of occupation to someone else in return for monetary benefits. The interests of
the freeholder are called freehold interests.
The interests of a person who possesses the right to occupation of a property
acquired by paying rent / premium to the freeholder also come under real property.
Such interests are normally called leasehold interests.
Real Property therefore includes bundle of rights which different persons possess in
the property.

Concept of Cost, Price and Value

It is necessary for a valuer to understand the concepts of Cost, Price and Value.
These are dealt in brief below.

Cost – It is the amount of money needed to buy, do or make something. Cost may
be either an accomplished fact or a current estimate. Cost of an asset may be higher
than, lower than, or equal to the subject asset’s value.

Price – It is the amount of money expected, required, or given in payment for

something. From the point of view of a manufacturer or seller the Price (amount of
money expected) of a thing may include its cost to him and profit thereon. From the
point of view of the purchaser the price paid for purchase of a thing becomes his
cost.

Value – Is an estimate of what the price of an asset ought to be on the valuation

date. It can also be defined as an estimate of the present worth of the future benefits
that can be accrued from the asset.

Valuation – It is the act or process of developing an opinion of value.

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Valuation Report – It is a document relating to the appraisal / valuation of a property
which clearly and accurately sets out the conclusions of the valuation in a manner
that is neither ambiguous nor misleading and which does not create a false
impression. Valuation reports can be broadly classified into three types.

 Desktop Valuations – In such valuations no inspection is carried out, but the

valuer conducts an indirect verification where possible, of the documentation
provided by the client using for example online tools to determine the location, and
by using property portals and databases to analyse the market.
 Drive-by Valuations – The valuer after receiving necessary documentation
from the client carries out an external inspection of the property and gathers data
and other information at site.
 Full Valuation – The valuer carries out full inspection of the property and
does further investigations and information gathering, both technical and
administrative, as required to meet the requirements of the scope of work.

Interests in the property -

There are various type of interests / rights a person can hold in a property. These are
 Freehold Interest
Property held in vacant possession
Joint ownership
Tenancy in common
Lessor (Freeholder who has leased his property)
 Leasehold interest
Lessee
Sub Lessor
Sub Lessee
 License
Licensor
Licensee
 Life Interest
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 Easement rights
 Transferable Development rights (TDRs)

The freehold, leasehold, joint ownership rights are called ‘Legal Estates’ which hold
good against the whole world i.e. right in rem.
The Life interest and Easement rights are called ‘Equitable interests or rights’ which
are enforceable against some or certain persons / individuals and not against others
i.e. right in personam.
Freehold interest inherently exists in all landed properties, leasehold interests and
equitable interests are created out of the freehold interests.

Freehold interest
This is the supreme interest or highest ownership interest possible in real property,
wherein the owner exclusively enjoys the right to use the property for his/her
benefits and in perpetuity.
 Freeholder can hold, enjoy, and dispose the property subject to general law of
land and lawful rights of others.
 Freeholder can develop or transfer the property or create lesser interests such
as leasehold, life interests etc.
Freehold right is the greatest possible aggregate of rights, powers, privileges and
immunities available in real property.
A person who owns the freehold interest in a property when grants lease of the
property to another person creates a relationship of Landlord and Tenant (or Lessor
and Lessee). The lease agreement is a written, legal document based on property
and contractual law and sets out the rights and obligations of both the Landlord
(Lessor) and Tenant (Lessee).

Leasehold interests
This is a form of lesser interest created by freeholder in the property. Leasehold
interest is a right to occupy land or property by holder of the lease knows as Lessee.
Under this arrangement, the freeholder may grant a lease of the property to another
person for a certain period or in perpetuity in consideration for a price (premium) or
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periodic rent or a combination of both. The terms of lease are spelt in a document
called Lease Deed which contains the contractual terms or covenants of the lease.
The leasehold interest is generally for specific time period called the term. At the end
of the term the lease expires and the leasehold right comes to an end and the
property reverts back to the freeholder. One can thus say that lease interest it is a
wasting interest. However sometimes the leasehold right can be also for perpetuity.
The process wherein the property reverts back to the freeholder at the end of the
lease term is called reversion.

Lease hold interest is transferable and inheritable unless otherwise specifically

restrained by covenants of lease.

Lease covenants
The covenants lay down the conduct of both Lessor and Lessee during the lease
period. The duties and responsibilities of the lessor and lessee are documented in
the lease document in the form of lease covenants. The covenants also record ‘dos’
and ‘don’ts’ by the parties to the lease. The covenants normally cover various
aspects such as period of lease, lease premium, lease rent to be paid and whether in
advance or arrears and the period of rent payments i.e. monthly, quarterly, half
yearly, rent reviews and conditions if any thereto, notice period, lock in period,
extension of lease, use of common areas, use of common facilities, permission to
sublease, permissions for interior decoration and fit outs, capital expenditure
clauses, maintenance of the premises, responsibilities for taxes and insuring etc.
amongst other.

Lessor
A freeholder who grants lease is called lessor. On execution of lease the right of
occupation is passed on to the lessee for specified period as mentioned in the lease
deed. A lease is created by the lessor for deriving monetary benefits from the
property, the monetary benefits can be in the form of rent, or premium or both.
Generally commercial properties are built for the purpose of leasing them out and
deriving monetary benefits. On completion of the lease period, the interest of the
lessee ceases and the possession of the property reverts back to the lessor.
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Lessee
The person in whose favour the lease is granted is called the lessee or lease holder.
A lessee can enjoy the benefits of the property for the period of the lease subject to
the lease covenants. His rights are good against the whole world (right in rem) as
lease is considered a Legal Estate. He can sue in his own name against the
trespassers and other offenders, which rights are otherwise available to the free
holder of the property. After completion of the lease period lessee’s right of
occupation is extinguished and the possession of the property reverts back to the
lessor or his legal heirs as the case may be. This is known as reversion.

Sub lessor
The right to sublease stems from the covenants governing the lease agreement.
Such a right can be created if the lease document permits the lessee to sublease the
subject property. Such arrangements are quite common for commercial properties.
In such cases, the ‘sub-lessor’ (lessee in the parent lease document) can transfer his
right of occupation to another person known as ‘sub-lessee’ to derive monetary
benefits. It is obvious that the sublease period cannot exceed the residual lease
period of original lease, as the period of sublease is dependent on the period of
original lease. Even if the period of the sublease exceeds the residual period of the
original lease, it is bound to get terminated with the original lease. Sale of property
by the freeholder does not terminate legally valid lease or sublease and the
purchaser of the said property has to honour the lease and sublease in force.

Sub lessee
On execution of sub-lease interest is created in the property in favour of the sub-
lessee for the period of sublease. He enjoys the physical possession (right to
occupation) of the property and has right to derive benefits from the property during
the period of the sublease. On completion of the sublease period, which should not
be more than the balance term of original lease period, the property reverts back to
sub-lessor who is the lessee of original lease.

Some terms and conditions which form part of lease agreement are as under:
Lease Term – It indicates date of commencement and date of termination of lease.
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Renewal Clause – This deals with date of notice for renewal, renewal period if any,
and provision for revision of rent on renewal.
Amount of Rent - Fixed annual rent or monthly rent or ground rent and also
enhanced rent after fixed periods of intervals, say 5 years or 10 years.
Right for Assignment - Right to sub-lease the property, conditional or without any
conditions.
Restrictive Covenant - This normally means bar to alter building or change use of
land.
Vesting Back Land Clause - This is an important clause. Under this clause it is
provided that the lessee would, on maturity of the lease period, demolish
the building(s) erected on the lessor’s plot and would handover
possession of open vacant land back to the lessor. Many leases provide
that on maturity of the lease the lessee would hand over or return the land
to the lessor along with the building(s) free of cost. There could also be a
provision that the lessee would surrender back the land with the
building(s) to the lessor but the lessor will be required to pay mutually
agreed amount for the building(s) (usually depreciated replacement cost)
to the lessee.

License
License is a permission by the Licensor to Licensee to use the property and does not
create any interest in favour of the Licensee. Licence is not transferable nor
heritable. If the property is sold by the owner, the license gets terminated. A grant of
license is at the will of the Licensor who has the right to terminate it at any time if he
so desires. In India, it is seen that the residential houses, apartments and small
commercial properties are let out for 11 months on leave and license. This is
because a period of more than 12 months requires payment of stamp duty and other
charges.

Licensor
Licensor is a person who lets the Licensee enter and use his property for a specific
period of time.
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Licensee
Licensee is a person who enters and uses the property, upon the permission of the
Licensor, for a specific period of time as per the License agreement.

Acts dealing with Lease and Licenses in India -

In India, The Indian Easements Act, 1882 deals with Licences in property, whereas
Lease is dealt in Transfer of Property Act, 1882

Life Interest
A life interest may be created in both freehold as well as leasehold properties. While
a life interest in a freehold property ceases on the death of life interest holder, in
case of leasehold property the same ceases on the expiry of the lease or death of
the holder of such interest, whichever is earlier.
A person in whose favour a life interest is created can enjoy the property, as an
owner would, during his life time but cannot transfer it to someone else.
A life interest holder may sell his own life interest. However, the purchaser of such
life interest can derive income from the property or enjoy benefits till the death of life
interest holder. Hence, there is an element of uncertainty and probability in such
transactions.
Upon death of life interest holder, the property reverts back to the freeholder who
created the life interest. Such an interest can also be arranged to pass onto another
person if the freeholder so desires. This other person to whom the life interest
passes on death of the original life interest holder is called the ‘remainder man’. The
remainder man is mentioned in the life interest document as per the wishes of
freeholder.
The original grantor of a life interest or his legal heirs are called ‘reversioner(s)’. The
remainder man is a person other than the original grantor or his legal heirs.

Reverse Mortgage
Reverse Mortgage is a type of life interest created by a freeholder in his property in
favour of a financial institution. In this arrangement, the reverse mortgagor (generally
an elderly person who has assets but no steady income) receives periodic income
from the bank (mortgagee) during his lifetime. After demise of the reverse mortgagor
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the property vests with the mortgagee (Bank) for further steps to recover its dues as
per the extant guidelines.

Years' purchase (YP)

In valuations by the investment method, the factor by which the net income is
multiplied to arrive at capital value is called Years’ Purchase (YP). It is the present
value of Re.1 per annum for n number of years at a certain rate of interest and is the
reciprocal of the annuity Re. 1 will purchase. Tables of years' purchase are either
single rate or dual rate

Types of Values

Annual Letting Value (Annual Ratable Value)

It is the rental value of the property assessed by the local authority for levy of
property tax. However, in recent years several municipalities have dropped rental
basis for assessment of property tax and have adopted alternative bases such as
capital value basis or carpet area basis to determine ratable value of the premises
for tax purpose.

Accommodation Value
It is the value of a land which cannot be built upon because of its odd shape and size
or small area or lack of legal access etc. Normally such land is useful only to plot
owners along its boundary. Such plots invariably fetch less price than prevalent
market price and the value greatly depends on needs of the adjoining plot owners
and competition amongst them.

Auction Value
It is an estimate of the price that a property would fetch in an open market under
private or public auction. It is the price expected to be achieved at a properly
promoted (fully advertised), conducted (in an orderly manner) and attended
(adequate number of bidders) auction sale. Auction value (highest bidder’s offer)
may or may not be in accordance with market value of the property. It may be higher
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or lower than the market value depending upon the facts and circumstances of the
case.

Book Value
It is the value which is ascribed to a property shown in the accounts as a capital
asset or liability but is not necessarily current market value, since it may be based on
actual cost (less depreciation, if any) or on an earlier valuation after acquisition.
Depreciation applied could be by straight line method or diminishing balance method
as per the policy of the company. For an asset which is in use even subsequent to
claiming of 100% depreciation, its value is generally shown in books of account at a
notional value of Re.1.

Break-up Value
It is the value of a specific property, such an estate of land and buildings, based on
the assumption that it is allotted and sold in parts, in such a manner so as to achieve
the best possible price.

Development Value
It is the value attributable to a land considering its potential for development or
redevelopment. It is the amount by which the value of any property for development
or redevelopment differs from its value without the prospect of such development or
redevelopment.

Distress Value
When a property is offered for immediate sale by its owner, who is in distress or
under compulsion to sell, the price receivable in such circumstances is called
distress value of the property. It is a sale by an unwilling seller who is compelled to
sell his property for urgent need of money to meet his obligations or any other urgent
requirements. This value is normally lower than the market value of the property.

This term must be clearly distinguished from the term forced sale value. Forced sale
value is commonly used for the sale by an authority (banks, courts, mortgagee,
recovery tribunal etc.), other than the owner of the asset, for the recovery of his
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legal dues. Forced sale is normally by public auction whereas distress sale is by the
owner himself. However, in both the cases seller is an unwilling seller.

Divorce Value
It is the additional value released by the subdivision of a property into two or more
physical parts and/or interests. This value is the opposite of marriage value.

Forced Sale Value

It is an estimate of the price of a property (running or closed down unit) that can be
realised on “as in where is basis” in an open market but in the shortest possible time.
The forced sale is conducted by the authority through personal negotiations amongst
a limited group of buyers or by public auction but with a sense of urgency. The sale
of the assets is conducted by the authority (Court/Bank) to recover legal dues of the
owner. It is a case of an unwilling owner in urgent need of money to meet his legal
obligations. In such cases the seller is compelled and forced to sale the property to
clear his debt. Auction sale of non -performing assets by Banks is one such
example.

Going Concern Value

It is the total value of a business as carried on, with all its assets and liabilities,
goodwill and potentialities. It is an estimate of the price of a running business
(industrial or commercial) in an open market, with all its tangible and intangible
(including Goodwill) assets as well as all liabilities of the enterprise on the date of
valuation. It is an estimate of the business assets as a whole block and the
precondition is that the business unit must be profit making and a running unit. It is
also assumed that the unit will continue to operate in future i.e continued use of all
assets. It is a value of the property in continued use. For example if the premises
used are owned by the business, they form part of the going concern value on the
basis of their value to the business.

Sometimes the optimum value (on basis of highest and best use) of the assets is not
reflected in sale transaction price of the running unit. The reasons for the same are:
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(i) Continued use of the unit is assumed and ‘value in exchange‘ for the best
use of the property is not considered
(ii) Sale is executed as per business valuation of the unit on ‘Going Concern
Value’ principles ignoring permissible alternative user of the property.

Intrinsic Value
It is the intrinsic worth or the true value of the property as distinct from agreement
value (documented value). In India historically it has been a common occurrence to
find Intrinsic Value different from Agreement Value (documented value).
In such cases sale documents are drawn indicating prices of transaction at lower
level than intrinsic value of the assets to save on various taxes.

Investment Value
It is the value of a property, to a specific purchaser (investor), who intends to
purchase / invest in the property for investment or operational objectives.
Investment properties are not for:
a) Use in the production or supply of goods or services or for administrative
purposes, or
b) Sale in the ordinary course of business.
Investment value may or may not be equal to the market value.

Liquidation Value
Liquidation Value is the amount that would be realised when an asset or group of
assets are sold on a piecemeal basis. Liquidation Value should take into account the
costs of getting the assets into saleable condition as well as those of the disposal
activity. Liquidation Value can be determined under two different premises of value:
(a) an orderly transaction with a typical marketing period, or
(b) a forced transaction with a shortened marketing period.

Market Value
It is the estimated amount for which an asset or liability should exchange on the
valuation date between a willing buyer and a willing seller in an arm’s length
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transaction, after proper marketing and where the parties had each acted
knowledgeably, prudently and without compulsion.

Marriage Value
Marriage value is the value which is over and above the sum of lessor’s and lessee’s
individual interests in a leased property.
Due to different risk perception in the property market regarding lessor’s and
lessee’s interests, the sum of the value Landlords (lessor’s) interest and Tenants
(lessee’s) interest is usually lower than the total value after merger of their interests.
This difference in value is called Marriage value.

This is expressed by the formula:

Marriage value of property
= Full market value – (value of landlords interest + value of tenant’s interest)

Net Present Value

It is the sum of the discounted values of a prospective cash flow, where each
receipt/payment is discounted to its present value at a discount rate equal to a target
rate of return or cost of capital.

Notional Value (Hypothetical Value)

It is an estimate of value of the property worked out on notional concepts, for some
special purpose such as taxation. The notional value could be for the purposes other
than taxation also.

Potential Value
It is an estimate of the price of a property with existing inferior use or underutilised
development that would fetch in an open market by putting it to the highest and best
use instead of its existing inferior use. For example, a property with only 50%
consumed F.S.I. has balance potential of future development of 50% more.
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Realisable Value:
It means net amount likely to be realised by the owner on sale of the property. It can
be defined as the estimated selling price of the property less the estimated cost of
completing the sale. It is thus net amount left in the hands of the seller after payment
of expenses like advertisement cost, legal and brokerage charges etc. Realisable
value is on the assumption of proper marketing time to sell the property.

Rental Value
The rent that a property might reasonably be expected to fetch in the open market at
a given time, subject to the terms of the relevant lease.

Replacement Cost
Replacement cost is generally cost of a modern equivalent asset, which provides
similar function and equivalent utility to the asset being valued, but which is of a
current design and constructed or made using current cost-effective materials and
techniques.

Depreciated Replacement Cost

DRC is replacement cost adjusted for physical deterioration and all relevant forms of
obsolescence. After such adjustments, this is referred to as depreciated replacement
cost.

Reproduction Cost
It indicates the value by calculating the cost to recreate a replica of the asset under
consideration.

Depreciated Reproduction Cost

Reproduction cost is adjusted for physical deterioration. After such adjustment, this
is referred to as depreciated reproduction cost.

Reported Value (Appraised Value)

It is an estimated value of the asset as finally arrived at by a valuer after full scrutiny
of the documents, physical survey of the site conditions, inquiries and study of
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relevant facts and circumstances of the case. Reported value by the valuer could be
oral or written.

Reserve Value (Price)

It is the estimate of the minimum price that a property should fetch under properly
advertised auction. Any bid below reserve price value is rejected and auction is
abandoned. It is also known as upset price or floor price.

Salvage Value
It is the price expected for an asset (building or machinery) whose probable service
life i.e useful span of life is over but is still in continued use and in working condition
due to its physical condition. Thus salvage value is the value at the end of utility
period of the asset without being dismantled. Old machinery is sold (Salvage Value)
on ‘as is where is’ basis for utilisation somewhere else.

Scrap Value
It is the estimated price of the dismantled parts the property which has become
completely useless for any further use. Some of these parts / materials can be re-
serviced or recycled and hence have some value.
In case of old buildings to be demolished, scrap value is the sale price of re-
serviceable materials obtained from the building less cost of demolition, removal of
debris, and transportation. As a thumb rule scrap value of a building can be
considered to range between 5% to 10% of its replacement cost.

Sentimental Value (Personal Value)

It is a value of an asset to the buyer or seller on sentimental grounds rather than
considering market forces. It may be a special or fancy price due to sentimental
attachment to the property.
Thus, ‘sentimental value’ is the personal value to an individual and has no
consideration whatsoever in market value estimation. In the Land Acquisition case of
Dewan Anand Kumar, Delhi H.C. held, “To say that it is the value of the vendor that
has to be estimated is however not in strictness accurate. The land for instance, may
have for the vendor a sentimental value far in excess of its ‘Market Value’. But the
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compensation must not be increased by any such consideration. The vendor is to be
treated as a vendor willing to sell at the ‘Market Price’.”

Speculative Value
It is the value of a property to a speculator who invests in the property with the sole
motive of selling the property at a profit within a short period of time. If the speculator
thinks that a particular area is likely to command greater importance in near future,
he may invest funds by acquiring properties in said sector, even by paying a slightly
higher price than what is prevalent.

Special Value
Special value arises because of the special needs of a buyer and not because of any
special characteristics of the asset. Special value can be defined as an increment in
value for a particular owner or user or prospective owner or user of the property
arising from his special interest. In such cases purchase is not governed by
sentiments of individual but by his personal reasons. A purchaser may pay special
price (fancy price) for a flat because it is close to his work place as well as close to
his children’s school. A normal market participant will not have these special
considerations and hence will not derive extra benefits.

Statutory Value
It is a value of the property estimated in accordance with the provisions of a statute.
Statutory values are normally arrived at by a process which is rule based and may
not take into consideration market realities and practices as well as normal principles
of valuation.

Stigma Value
A property may have stigma attached to it because of certain occurrences or beliefs
or events in the past. Examples of such cases could be a house which considered as
haunted, a place which was previously used for cremation or a contaminated site
which has now been remediated.
It is seen that generally stigma wears out with passage of time. Some stigmas are
short lived where as some other stigmas last much longer. Properties affected by
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stigma are normally available much cheaper as compared to the value of similar
unaffected properties in the locality.

Value in Use and Value in Exchange

Value in use - is the value of an asset which is owner occupied and taking into
consideration its present use.
For the purpose of financial reporting it is defined as the present value of the future
cash flows obtainable as a result of an asset's continued use, including those
resulting from its ultimate disposal.

Value in exchange - is the price that prevails in a free, open and competitive market
on the basis of an equilibrium set by forces of demand and supply. It is objective as it
is based on observable economic forces. Highest and best use is considered while
estimating value in exchange. It can be said that Market Value is value in exchange.

Written-down Value
WDV at a given time is the result of making one or more annual or periodic
deductions for depreciation against capital cost or worth of an asset.

Types of Rents

Type of rents: There are many types of rents received in various situations and for
varied reasons. Some of these are:
 Ground rent
 Head rent
 Nominal rent
 Actual rent / contractual rent
 Market rent
 Profit rent
 Virtual rent
 Monopoly rent
 Peppercorn rent etc.
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Rent being paid or rent in passing is a guide for valuation purpose. One has to also
check the services included in the rent paid / received. Some rents are inclusive of
all taxes, and some are exclusive of taxes. Moreover, rents vary according to
attributes such as location, type of property or premises, size etc. While considering
a rental income for valuation, the valuer has be mindful of the repairs and insurance
expenses and who has to bear them.

Ground rent
It is the rent charged by the land owner (Lessor) to the tenant (Lessee) for the use of
land under specified and mutually agreed lease terms and conditions. It can be
monthly or quarterly or half yearly or annual rent in advance or arrears. The ground
rent may be fixed for entire lease period or may be increased at fixed intervals or
may be reviewed at the time of renewal of lease.

Rack Rent
It is the actual full rental value receivable from the property. It may be rent for land or
for land and buildings. Rack rent is same as Market rent.

Gross Rent
This refers to the amount received periodically (usually per month or per annum) by
the landlord from the tenant. Outgoings need to be deducted from the gross rent to
arrive net rent figure.

Head lease rent

Many a times the main lessee called Head Lessee, sub- leases the property to
another person called Sub Lessee. Head lease rent is the rent paid by the Head
Lessee to the freeholder (lessor). The term Head lease rent is used to distinguish
this rent from the rent paid by sub-lessee to head lessee.

Profit rent
It is the difference between the market rent and the rent in passing i.e the rent paid
by a lessee or sub lessee as the case may be. When a profit rent exists, the occupier
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saves on his annual expenditure as the actual rent payment is less than the full
rental value which he would have been required to pay in normal course of events.

Profit rent may arise because the lessee or sub lessee has been in the occupation of
the premises for some period and the rent in passing has not been reviewed recently
whereas the market rent has moved up, or a premium may have been paid at the
commencement or during the period of lease.

Contractual Rent
It is the rent mutually agreed between the landlord and the tenant under a tenancy
contract, which may be written or oral. The rent may be for use of land or for land
and buildings. This rent may or may not include property taxes and other outgoings.
The contract includes the agreed terms and conditions.

Standard rent
Standard Rent is the rent payable by the tenant to the landlord as per the norms
fixed under the Rent Control Act. It can also be defined as the rent fixed by the
Court, for land or land with building (premises) in accordance with the provisions of
Rent Control Act. The Rent Control Acts of various states in India define the term
“Standard Rent” and also clarify which rented properties are included and excluded
under different circumstances. As per the Act, the landlord cannot charge or receive
from the tenant, any amount in excess of Standard Rent.
Presently in most of the states in India, the Rent Control Act is applicable only for
those properties where the rent being paid per month is less than a certain stipulated
amount and also in certain notified areas.

Virtual Rent
Virtual rent is the sum of the actual rent paid by lessee, annual equivalent of
premium amount paid to the lessor and annual equivalent of capital sum invested by
lessee on improvements of the rented premises.
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Market Rent
It is the estimated amount for which an interest in real property, should be leased
(let) on the valuation date between a willing lessor and a willing lessee on
appropriate lease terms in an arm’s-length transaction after proper marketing where
the parties had each acted knowledgeably, prudently and without compulsion.

Concessional Rent
When the owner gives premises on rent to a related party (relative or friend or sister
concern) at a token or nominal rent which is below the market rent, it is called
concessional rent. This is not an arm’s length transaction.

Monopoly Rent
Sometimes a property may have unique location. This locational advantage can be
exploited the owner by charging monopoly rent to the occupant. This rent is
normally higher than market rent prevailing in the locality.

Peppercorn Rent
A very small nominal amount (say Re. 1 or Rs. 10 per annum) paid as rent by the
tenant to the owner of the land or building so that the arrangement between them is
legal. This is because legal contract requires that each side must provide some
consideration i.e. something of value to the other party for the contract to be binding.

Headline Rent
It is the rent paid under a lease after the end of any rent free or reduced rent periods.
It is an inflated rent which ignores the rent free period or any other concession given
by the landlord to the tenant in return for a higher headline rent.

For example if a landlord wants to achieve a headline rent of Rs. 1,00,000/- per year
for a five year lease but the market rent of the property is Rs. 80,000/- per annum, he
may agree for a rent free period of one year followed by four years at the headline
rent of Rs. 1,00,000/- per annum. In both the cases the tenant ends up paying
Rs. 4,00,000/- over the five year lease period.
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Net Effective Rent
It is the net rental value of all the rental payments over the period of the lease as well
as any other abatements or incentives that might add to or lower the payments. It is
the true rent after taking into account the rent concessions.

For example if a landlord offers one month rent free period to a tenant for a lease
that is signed for a period of 12 months and if the rent paid is Rs. 1500/- per month,
the total rent paid is Rs. 18,000/-. However over a period of thirteen months (which
includes one month rent free period) the net effective rent is Rs. 1385/- per month.