Marriage value is the difference in a leasehold property’s value before the 80 year lease is extended and after. The difference between these two amounts needs to be paid to the freeholder of the property as compensation.
Leasehold properties come with a lease term, which sets out the number of years you’ll own that property for. For a residential flat, leases are generally between 99 and 125 years, while for a residential house, they can be as high as 999 or as low as 155.
It’s important to take action when the lease starts to drop towards 80 years, because when the lease falls below 80 years, so does the value of your leasehold property, and this can cause problems later down the line if you decide to sell or re-mortgage. But these pitfalls can be avoided if you extend the lease in good time.
So in a nutshell, marriage value reflects the extra market value of the extended lease.
When you apply for a leasehold extension, you effectively get a new lease, with an extra 90 years added on to the remaining number of years. This will include the same terms and conditions as your old lease, but you’ll only pay a ‘peppercorn’ rent (which is set at zero).
While this works out in a leaseholder’s favour financially, it leaves the freeholder (landlord) dis-advantaged as they lose out on their annual ground rent.
To extend your lease, you’ll need to pay the freeholder an amount of money, known as a premium or compensation. This is because of the Leasehold Reform Housing and Urban Development Act 1993, which states that the amount calculated needs to reflect:
· The diminution of the property’s value
· The freeholder’s share of the marriage value
· Any compensation owed
Under the Leasehold Reform Housing and Urban Development Act, the freeholder is entitled to a 50% share of the marriage value when you get a new lease. But the marriage value only has to be factored into the calculation if the lease has less than 80 years left to run. If it’s above 80, then the marriage value is valued at zero.
Marriage value is calculated by working out the difference between the following amounts:
The total value of:
1. The leaseholder’s interest under their current lease
2. The landlord’s interest in the property before the grant of the new lease
3. Any intermediate interests before the grant of the new lease
The total value of:
1. The leaseholder’s interest under the new lease
2. The landlord’s interest once the new lease has been granted
3. Any remaining intermediate interests once the lease has been granted
If you’ve owned your leasehold property for at least two years in England and Wales, you have the legal right to extend the lease term and start a new lease with an extra 90 years.
But if you are an assured shorthold tenant (which applies if your rent is above £250 outside of London or £1,000 in London), then you’re unable to extend your lease because of the low rent test in the Leasehold Reform Act 1967.
Once you get your new lease, your ground rent will reduce to a peppercorn rent (meaning you’ll no longer pay any).
The cost will vary for every individual case, but generally, you can expect to pay:
· A premium (also known as compensation)
· Other fees and taxes such as Conveyancing and surveyor fees, and the landlord’s legal fees
While it’s possible to get a rough estimate for the premium you’ll pay by using an online calculator, the final amount will be decided between yourself and your landlord, taking into account the marriage value.
If you can’t agree on the premium with the freeholder, then the amount can be decided by a First Tier Tribunal. But this can be a lengthy and expensive process so for many leaseholders, it’s best to try to reach an agreement outside of tribunal.
For example, if you own a property worth £150,000 when it’s got less than 80 years left on the lease, and you find out that it’ll be worth £200,000 after extending the lease, then the marriage value would be £50,000.
You’ll then owe your landlord £25,000 in compensation when extending your lease, as they’re entitled to 50% of the marriage value.
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