What is Marriage value in leasehold property lease extensions?
As of 24 May 2024, it is all change with leasehold reform – the Leasehold and Freehold Reform Act 2024 has now been passed and achieved Royal Assent. Despite the fact the bill has passed, it isn't in effect - and we don't know when it will be. See the article below which at the time of print in July 2023 was accurate.
What is leasehold property?
To understand marriage value, we must first understand what a leasehold property is.
In the UK, a leasehold property is a home or land that you have the right to use and occupy for a fixed period, known as the 'term' of the lease. A lease agreement is made with the property's freeholder, who retains ownership of the property's land and structure. Typically, lease periods can range from 99 to 999 years.
You can read more about how leasehold differs from freehold.
Importantly, the lease term is not forever. As the remaining term becomes shorter, the property's value decreases, reflecting the decreasing remaining time that it can be enjoyed.
This can cause potential issues when trying to sell or remortgage. In some situations, leaseholders might opt to extend their leases. This is where the notion of marriage value becomes relevant, particularly if the lease has less than 80 years remaining.
What is marriage value?
Marriage value is a term specific to leasehold property law, and in particular, the Leasehold Reform, Housing and Urban Development Act 1993.
Simply, marriage value means the increase in the property's total value once the lease is extended. It's the financial benefit or 'profit' that results from merging the freeholder's and leaseholder's interests, hence the term 'marriage'.
When the term of a lease falls below 80 years, the law states that the marriage value should be shared equally between the freeholder and the leaseholder.
It is crucial for leaseholders, especially those with less than 80 years remaining on their leases, to be aware of this potential additional cost.
How does marriage value influence the property's worth?
The marriage value can be significant. After a leasehold extension, ownership looks more similar to a freehold property. Ground rents payable to the landlord are reduced to a peppercorn and the combination of practically zero ground rent and a longer right to live in the property increases the property's marketability.
Why is 80 years of importance?
If the current lease has more than 80 years remaining on its term when extended (known as a long lease), the leaseholder does not have to share the marriage value with the freeholder. With less than 80 years on the lease (known as a short lease), the marriage value must be split, with the leaseholder paying the freeholder.
This extra cost can escalate into tens of thousands of pounds, making the lease extension process considerably more expensive.
How do we determine marriage value?
The computation of marriage value involves valuing the interests of the leaseholder and the freeholder, both now and after a new lease has been granted.
Valuation is always subjective, so you need a chartered surveyor who has specific expertise in leasehold valuation to carry out the work, so that they can objectively justify their estimates.
Valuation takes into account various factors like the existing lease's terms, the ground rent, the lease length, and the property's location.
How does market value and ground rent affect the calculation?
Both the market value of the property and the ground rent are important.
The market value is the property's current worth in the local market, considering factors like location and property condition.
The ground rent, paid annually to the freeholder, impacts the calculation since a longer lease usually means that the ground rent becomes peppercorn, or nominal.
Can you provide an example of how to calculate marriage value?
Calculating the marriage value involves subtracting the freeholder's and leaseholder's interest in the property before the lease extension from the overall value after the lease is extended.
For instance, consider a property valued at £500,000 with 75 years remaining on the lease. The ground rent is £500 per annum. Similar properties in the area with remaining leases of 160 years are worth £600,000.
The leaseholder's interest today is worth £500,000.
The landlord's interest is today's value of the rent that would be collected over the next 75 years. That isn't 75 x £500 = £37,500, but rather 500 for each year, discounted to today's value of that future rent.
As time goes by, inflation reduces the value of the rent. A rate of reduction of 4% a year renders £500 in 75 years' time as being worth £26.39 today.
Keeping to the rate of 4%, the landlord's interest is worth £11,840.
The 'marriage' of the two valuations is £511,840.
Because the law says that any new lease must have a ground rent of no more than a peppercorn, we can assume that the landlord's interest post-extension is zero (technically it isn't, but for ease we can assume that it is).
The leaseholder's interest post extension is worth £600k.
The marriage of the two valuations is post extension is £600k.
The difference between the two valuations is £600,000 - £511,840 = £88,160. The freeholder is entitled to half of that amount, £44,080, for an extended lease.
The reason that you need specialist solicitors and chartered surveyors is that the marriage value depends on three untested values - the market value of the property now, the market value of the property if the lease were extended, and the rate of reduction (the inflation rate). There need to be justifiable reasons why those figures were chosen if a dispute over them arises with the landlord, and consequently the leaseholder is forced to ask the First Tier Tribunal to judge whether they are fair.
Key points
What happens to the marriage value when extending a lease?
Marriage value increases as the remaining term of the original lease decreases. But the increase is not linear.
The reason for this is that as the term ticks by, it becomes more difficult for an 'average' leaseholder to pay the share of the marriage value. You can't obtain a mortgage for it, so you need to have cash to pay this extra value.
But the problem is that there might not be many people who have the spare cash, particularly when legal fees are added to the cost. The pool of potential buyers for your house or flat decreases, and so does the current price as a function of reduced market demand. That makes the gap between the current value and the future value greater.
When the unexpired lease term drops below 80 years, the cost of extending the lease can escalate due to the inclusion of marriage value. This can add tens of thousands to the lease extension price, in addition to the freeholder's legal fees and valuation costs.
As such, it's often advised to extend your lease before it reaches the 80-year threshold to bypass the marriage value charge.
How does the value of the leaseholder's and landlord's interest change when a lease is extended?
On extending a lease, the leaseholder's interest generally rises in value. They gain a longer term of ownership and reduced ground rents.
On the contrary, the landlord's interest can decrease, as they lose future ground rents and the right to regain possession of the property sooner.
The marriage value, shared equally between leaseholder and landlord, represents this shift in value.
How does marriage value affect lease extension costs?
In an informal lease extension process, the leaseholder and the landlord negotiate the terms directly. This includes the marriage value.
The law doesn't govern this process, so the marriage value's calculation and division may be flexible. Skilled negotiation can result in a favourable outcome. It's worth bearing in mind that legal advice can be advantageous in these circumstances.
Negotiating marriage value
Engaging in negotiations with your landlord might result in a reduced marriage value charge.
Showing local knowledge about property prices or involving a specialist solicitor can be beneficial. A professional may entail upfront costs, but they may save you more in the long run.
If the calculated marriage value doesn't sit right, leaseholders can challenge this through the First Tier Tribunal. This independent body can adjudicate on property valuation disputes. Although this process can be time-consuming, it's a viable option when negotiation fails.
Future prospects: will marriage value be abolished?
There is continuous discourse about the fairness of marriage value in UK property law.
Reforms of legislation proposed by the Law Commission could see the eradication of marriage value. This could potentially make lease extensions more affordable for many.
The UK government has shown interest in these leasehold reforms, but no legislative changes have been enacted at the time of writing.
Should marriage value be abolished, leaseholders could see a dramatic reduction in lease extension costs. This would also relieve the urgency to extend leases before they drop below the 80-year mark.
For landlords, the absence of marriage value could mean lower financial returns from lease extensions.
Only time will tell what changes will be legislated.
Beaumont Gibbs strongly recommend that you take proper legal advice if you are thinking of buying or selling a property with a lease below 85 years.
THIS ARTICLE WAS TAKEN MY THE LEGAL FIRM NETLAWMAN.CO.UK