Freeholding and leaseholding … it’s a complicated world that operates with rules and regulations most of us have no concept of. For example, did you know that running a lease to under 90 years can start to damage your resale options, making a property lose value?
Also, did you know that renewing a lease that has slipped to fewer than 80 years incurs an additional premium? It’s true and it’s also something that many leaseholders – and possibly some freeholders – don’t realise. This premium is known as the marriage value.
A Marriage Made in Heaven
So far, we’ve established that properties – typically flats – with a long lease are worth more than those with a short lease. So, what is Marriage Value? Marriage value, in the simplest terms, is 50% of the difference in value between a property with a short lease and the lease being renewed. It applies to all leasehold properties when they fall below 80-years.
As the increase in value only occurs after the freeholder has agreed to renew the lease, it was stated in the 1993 Leasehold Reform Act that this value should be split between the leaseholder and the freeholder.
Why? Because it’s seen that while the lessee benefits from the renewed lease, the freeholder is disadvantaged; so the marriage value was created to compensate them.
Marriage value is essentially the freeholder’s share of the increase in the property’s value that the lease renewal has generated. This share will always be 50%.
Leases which have more than 80 years remaining have a marriage value of zero.
How is Marriage Value Calculated?
There are many factors involved in calculating the marriage value. It depends on the length of the lease at point of renewal, the current property value, the expected property value with the new lease and the ground rent income from the lease. Hence there’s no real rule of thumb.
What is certain is that the cost for renewing a lease differs depending on the existing lease length and the property value – i.e. it might cost £5,000 to renew a 95-year lease, but could cost £15,000 to renew a 60-year lease for a property value of £150,000.
A property worth £400,000 with a 60-year lease could cost as much as £40,000 renew. This, of course, is dependent on the factors listed above.
When the marriage value (50% of the added value) has been established, it is that which the leaseholder should expect to pay the freeholder as a premium in addition to other costs.
Freehold Sale’s Adam explains more clearly: “Without being too confusing, marriage value is 50% of the increase in property value once you’ve renewed the lease. If the property went up by £20,000 – you’d pay a premium of £10,000 to the freeholder, added to the renewal cost.”
It is complicated; therefore both parties are advised to contact a professional to ensure that the amount calculated is correct and takes into account any other factors as applicable.
If you would like any further clarification or have a general query, please don’t hesitate to get in touch.