It’s time to abolish Marriage Value
Linz Darlington, managing director of Homehold, which offers an end-to-end lease extension service with an integrated firm of lease extension solicitors, explains why the government need to make good on their promise to abolish Marriage Value
So, you own a flat and therefore have the right to extend your lease by an additional 90 years and remove your ground rent. To do this, you must pay your freeholder a price known as a “Premium”.
But as soon as your lease drops below 80 years, the cost of doing a lease extension jumps up significantly. This is because if your lease is below 80 years, the Premium includes an additional element called “Marriage Value”.
This article explains why Marriage Value is deeply unfair on leaseholders, and why the Government need to make good on their promise to abolish it in the last session of Parliament.
How is a lease extension premium calculated?
When you do a lease extension you must pay your freeholder a price, known as a “Premium”. If you extend your lease when you have over 80 years remaining, this premium includes two things.
The first is a payment for buying the extra 90 years. The second is to “buy out” your future ground rent payments. The idea of these two payments is that you must compensate your freeholder for their loss. Namely, this is the fact that they will no longer get your flat back at the end of its existing term, and they can no longer collect the ground rent.
If your lease is below 80 years at the point at which you extend, you also must pay a third and additional cost known as “Marriage Value”.
The idea behind Marriage Value is as follows: whatever your flat is worth now with a short lease, it will increase in value when you do a lease extension. If you deduct from this increase in value the cost of purchasing the extra years and buying out the ground rent, then you’re left with the hypothetical profit you will make when you extend the lease. You have to pay a 50% share of this to your freeholder.
Why is Marriage Value so unfair?
The first two elements of the lease extension Premium require you to compensate freeholders for their loss of the ground rent and the handing back of the flat back at the end of the lease.
However, with Marriage Value, it isn’t about compensating the freeholder for their loss, it is about allowing them to share in your hypothetical profit when you extend your lease.
The crux of why this is so unreasonable is that you, as the leaseholder, won’t make a profit at all.
This is summarised below into three of the main reasons why Marriage Value needs to be abolished.
Reason 1: The “profit” doesn’t take into account that the leaseholder has to pay both sets of fees
Imagine you do a lease extension, and it is agreed that the hypothetical profit that you will make when you extend your lease is £6,000. Your freeholder demands half of this, or £3,000.
However, Marriage Value doesn’t consider the fact that you will have to spend money on your legal and valuation costs to do a lease extension – commonly about £3,000 (inclusive of VAT). It also doesn’t consider that you must also pay your freeholder’s fees too – with a private landlord this is usually another £3,000.
This means that if you make a hypothetical profit of £6,000, you must give half to your freeholder and your profit is reduced to £3,000. If you then subtract both sets of fees, you’ve actually made a significant loss.
Reason 2: It depresses the value of flats with short leases – meaning the freeholder’s half of the “profit” during lease extensions gets bigger and bigger
As previously mentioned, the amount of Marriage Value payable during a lease extension is dependent on the difference in value between what your flat is worth before a lease extension and afterwards.
Now, imagine you want to buy a flat with a 70-year lease and you’re deciding how much to offer the seller.
You will use one of the many available calculators to estimate how much it will cost to extend the lease and then knock this price off what you’d offer for the flat with a long lease. Chances are, you’ll reduce your offer price further to consider the fact that you’ll be lumbered with both sets of professional fees for extending the leases, and then a bit more for taking on the hassle of the process.
The seller will accept your low offer, because they don’t want to incur the costs and hassle themselves.
Unwittingly, you’ve just created a sales transaction that a freeholder can use to evidence the fact that the price of your flat is heavily depressed with a short lease, and the profit you subsequently make when you extend the lease will be considerable. This can affect the price of your lease extension, and other people’s lease extensions, too.
This creates an odd circularity between the cost of lease extensions and the price of flats with short leases, where there is a downward pressure on the value of short lease flats and a corresponding upward pressure on the cost of lease extensions. It is why lease extensions have got increasingly more expensive as the years have gone by.
Reason 3: The “profit” is actually just returning the money you have already lost
Imagine we’re in a steady housing market.
If you own a flat, every year your lease will get shorter and every year the amount you could sell for your flat would go down slightly. Every year you make a hypothetical loss.
Imagine you bought a flat new on a 99-year lease and owned it for 20 years, to the point it had 79 years remaining. It’s now worth less than it was when you paid for it with a long lease.
Your freeholder now wants a share of the increase in value you’ll receive when you extend the lease. Why should they? They didn’t share in the loss as your lease got shorter and the flat got less valuable, why should they receive anything when the value rises now?
Even if you weren’t the original owner of the flat, it is still your preceding leaseholders who lost out – not your freeholder.
The Government seem to have backtracked on their promise to abolish leasehold all together. We need to keep them true to their promise to abolish Marriage Value.
Freeholders will argue that removing Marriage Value will reduce the value of their assets and infringe on their human rights.
This must be wrong and should be ignored: “Marriage Value” means a freeholder receives a share of the leaseholder’s value when they do a lease extension; it is not compensation for a loss in the freeholder’s value in their property asset.
Related posts:
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Wideboy freeholder cuts £4,000 demand for leasehold flat refurb to £2,000
Metropolitan housing association MTVH tells MPs: we won’t collect ground rent, we have ditched marriage value and all leases are 990 years (where possible)
Are you overpaying for your lease extension?
Just how much can a freeholder charge in a leasehold flat sale?
Odevo rivals FirstPort as largest managing agent after hoovering up rivals
I am putting this out to create a debate. I have dealt with Linz and he and I agree to disagree amicably. I have dealt with his firm, Homehold when leaseholders have wanted to extend their leases and we are the freeholder – he does operate a very efficient process for extending leases
The concept of splitting the marriage value arose when the 1993 Act was passed, giving lessees the right to be able to extend their leases. Because up to then the freeholder did not have to extend the lease, and many of the Great Estates who take a very long view wanted to get the flats back at the end of the term . Therefore, in taking away the freeholders right to receive the reversion at the end of the term it was necessary to pay compensation which included a share of the marriage value Perhaps it might be equitable to retain the marriage value where the lease was granted prior to the 1993 Act ?
For lease granted after 1993 it was known by both parties that marriage value would form part of the premium required to extend the lease, again the apparent injustice some perceive there to be would be reflected in the price paid initially for the flat
Another argument is that marriage value arises because the capitalization rates and deferment rates used are not correct. In an efficient market in a “no act world” the value of the short lease should differ from a long lease by the value of the capitalized value of the rent and the value of the reversion. It could be argued that the rate used to value the reversion has until recently been too high, at 5%. If it was lowered to 4% marriage value more or less disappears.
So the government could make the calculation easier and quicker, if it abolished marriage value and lowered the deferment rate to 4%. Where it could make real savings for lessees is to require the landlord to bear his own costs . Certainly if the freeholder acquired their interest post 1993 when lessees rights to enfranchise or extend their leases had been given
Marriage value is not usually based on the relative shareholdings in the property – the freeholder often has less than 5% interest by market value in the property compared to the leaseholder, although a property with less than 80 years usually sells for less than one with a longer lease, mainly because of the “marriage value sword of Damocles” hanging over it. Also if the leaseholder adds value then that should be reflected in any so called compensation to the freeholder (reduce it) along with taking into account the relative shareholdings.
Stephen,
Another well informed and very useful contribution to this platform that will undoubtedly go over the heads of around 99.97% of those that read you posting.
Very few of us have your obvious level of your Professional understanding of Freehold and Leasehold Law, and that may go some way to explain why Millions of us were “suckered” into buying a long Lease.
I look forward to future debate with you on this subject. My opening “gambit” is abolish Freehold? Your move.
“Abolish Freehold (I think you mean leasehold). That is a simply spiffing idea, why hasn’t anybody thought of that before now?
Lease holders defiantly need changes made even if they scrapped marriage value and used a different method where all costs are at a set price and not based on the estimated value of a property if you are to sell it.
As in a lot of cases when you extend the lease you plan to still live in the property how are you supposed to fund this marriage value penalty!
My elderly parents have a leasehold property which they purchased back in the 1980s at the time the lease was something like 64 years left on the lease so already short. When we have recently tried to extend the lease we had to pay all the fees for a freeholders surveyor to come and value the property (£1000)!!!
Then the quite we recieved to extend the lease was £250,000!!!!
How on earth is anyone supposed to fund that kind of money!!!!
Something has to be done as when the lease runs out on a lot of these property’s who’s is going to house the people who have no where to go?? The massively overwhelmed local councils???
Shocking, and sadly affecting a lot of people. The conveyancer did not do a great job for your parents back in the 1980s, maybe the price was reduced because of a short lease but I doubt it.
Kerry,
The whole Freehold – Leasehold racket is just one huge money making scheme that legally exploits the Leaseholder to the limit of the Law, and often beyond.
You only need to read the pages of LKP for many recent proven examples of where the Freeholder or their specially selected Managing Agent have had to repay money owed (often large sums) to Leaseholders. Unfortunately due to the total inadequacy of the Law claimants have to obtain money owed through the FTT on a case by case basis. How about extending the Law of the land to all current and past victims of proven wrong doing, at the time of writing?
As it stand the current set up is no deterrent to “rogue players” It is simply the numbers game in my opinion.
The total abolition of Leasehold -Freehold is the only solution in my view, to be replaced with Commonhold.
I totally agree we need something done very soon.
I fear that alot of MPs have a vested interest in keeping the leasehold sector as it is as many of the MPs are themselves freeholders and have much to gain by keeping this corrupt feudal system in place.
If they are not freeholders themselves then they are re financially backed by millionaires who are and are not willing to upset them for fear of withdrawal of cash.
How could it ever be put to a fair vote if this is the case?