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.