While the name might draw up connotations of weddings and nuptials, ‘marriage value’ is a term used to refer to the value of a leasehold property. It specifically refers to the difference between a leasehold property’s value before and after the 80-year lease is extended. In other words, the Marriage Value of a property reflects the extra market value of a leasehold property once the lease has been extended.
What is a Leasehold Property?
When you buy a residential property – be it a house or a flat – it will be sold under either a freehold or a leasehold agreement. If it is a freehold property, then you won’t have to worry about Marriage Value, ground rent, or any other issues that are related to leasing a property. If, on the other hand you are a landlord leasing out your freehold property, or a buyer who has bought the lease to the property, there are some things you should be aware of.
Put simply, a leasehold property comes with a lease term. This term can vary significantly, with residential flats typically sold with leases from 99 to 125 years and houses carrying leases of up to 999 years. However, the most important figure to be aware of when it comes to lease terms is 80 years.
Once the lease term of a property falls below 80 years, the value of that property can fall significantly. This can cause problems for the leaseholder if they decide to sell or remortgage the property further down the line. It is, therefore, recommended that the leaseholder seeks to renew their lease before it drops to below 80 years.
How is the Marriage Value calculated?
When applying for a leasehold extension, you are applying for a new lease. This new lease agreement will feature a new lease term – 90 years in addition to the time remaining on the original lease. The lease will contain the same terms and conditions as the previous lease but the leaseholder will only have to pay a ‘peppercorn’ rent, which is set at zero.
This may be a bonus for the leaseholder, but it puts the freeholder at a disadvantage as they will lose out on the ground rent (a fee paid annually to the landlord) from the property. Therefore, in order to extend a lease, the leaseholder is required to pay the freeholder a determined amount of money – known as a premium or compensation.
Under the Leasehold Reform Housing and Urban Development Act 1993, the calculated amount should reflect:
- The diminution of the property’s value
- The freeholder’s share of the marriage value
- Any compensation owed
Under this legislation, the freeholder is entitled to 50% of the Marriage Value when the leaseholder extends their lease. However, the Marriage Value is only required to be factored into the compensation calculation if the lease has less than 80 years left; if it has more than 80 years, then the marriage value is valued at zero.
For example, if a property is worth £150,000 before the lease is extended and is worth £200,000 after the lease has been extended, the Marriage Value would be £50,000. The leaseholder would, therefore, be required to pay the freeholder £25,000 (50% of the Marriage Value).
The total value of the leaseholder’s interest under their current lease, the landlord’s interest in the property before the new lease is granted, and any intermediate interests before the new lease is granted is compared with the total value of the leaseholder’s interest under the new lease, the landlord’s interest once the new lease has been granted, and any remaining interests once the new lease has been granted. This determines the Marriage Value.
How much does it cost to extend a lease?
If a leaseholder has owned a leasehold property in England or Wales for two years or more, they are legally entitled to extend their lease term. If, however, the leaseholder is an assured shorthold tenant (which is the case if their rent is above £250 outside of London or £1,000 in London), then they are unable to extend their lease. This is due to the low rent test as defined by the Leasehold Reform Act 1967.
The cost of extending the lease will vary from case to case depending on a number of factors. For example, the premium (paid to the freeholder of the property) and other fees, such as conveyancing and surveyor fees, as well as the freeholder’s legal fees, will all contribute to the final cost of extending the lease.
The final value of the premium to be paid needs to be agreed upon between the leaseholder and the freeholder (landlord). If an agreement cannot be reached, then the amount can be decided by a First Tier Tribunal; however, this can be an expensive and lengthy process, so most leaseholders will try to avoid this route.
At Horizon Management, our block management team has the expertise to help make leasehold discussions as smooth as possible – for both the leaseholder of the flat and the landlord. We work with both external landlords and Resident Management Companies to ensure the effective management of blocks, from administrative and legal duties to everyday management of communal areas.
To find out more about how Horizon Management could help, get in touch with our friendly team today.
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