MARRIAGE VALUE IN CASE OF LEASED HOLD PROPERTIES

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 remortgage. But these can be avoided if you extend the lease in good time.

So in other words, marriage value reflects the extra market value of the extended lease.

Calculation of marriage value:

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 your favour financially, it leaves your freeholder (landlord) slightly disadvantaged 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

Taking the figures from the example, the calculation will be:

leaseholder’s present interest   = Rs.150,000

plus landlord’s present interest = Rs.6,600

                = Rs.156,600

leaseholder’s new interest          = Rs.165,000

plus landlord’s new interest        = Rs.74

                = Rs.165,074

The marriage value is therefore Rs.165,074 minus Rs.156,600 = Rs.8,474

Taking the 50:50 split between the landlord and the leaseholder, the leaseholder would have to pay half this figure – Rs.4,237 – in addition to the reduction in the landlord’s interest.

In this example it can be seen that marriage value can considerably exceed the value of the landlord’s interest. Its calculation is dependent upon the estimated increase in value of the flat and, clearly, the lower that increase the lower will be the marriage value. This is an area where the input of a valuer with local knowledge is of paramount importance to both parties in order to provide substantive comparable evidence of the local market and how, if at all, flat values will be affected.

The longer the current lease the lower the latent marriage value may be, until eventually it becomes negligible.