Leasehold marriage value under the spotlight following Law Commission publication
Leasehold marriage value is under the spotlight after the Law Commission published its eagerly awaited proposals on reforming the law on the valuation of freehold purchases and lease extensions.
Sarah Taylor, a Senior Associate in the Property Disputes team at the law firm Royds Withy King comments:
“One of the big issues with the current legislation is a payment by the leaseholder to the freeholder for ‘marriage value’. The value of the combined freehold and leasehold interests is greater than the value of the individual interests. Marriage value is the name given to this increase (i.e. the difference between the individual and the combined interests).”
“When acquiring the freehold of a leasehold property, the current legislation requires the leaseholder to pay half the marriage value to the landlord where the lease has less than 80 years to run. When a leaseholder extends a lease with fewer than 80 years left to run, marriage value is also payable.”
“There is also ‘hope value’, a deferred form of marriage value whereby the freeholder hopes to sell the freehold to the leaseholder in the future, which in turn would realise marriage value. The leaseholder will pay a sum to reflect this ‘hope’. Hope value is always less than marriage value and the leaseholder would only ever pay one or the other.”
The Law Commission was tasked with exploring options to reduce the cost of lease extensions and purchases of a freehold interest by leaseholders. This not only has legal implications but also political implications as by making the process the process cheaper for leaseholders, meaning freeholders could potentially lose out.
The Law Commission has put forward three proposals:
- Option 1. The premium will be calculated by reference to term and ground rent only. No marriage value will be payable irrespective of the length of the lease term.
“This option is likely to be met with much resistance from freeholders as there would be no marriage value payable. There would be potential for a Human Rights challenge by freeholders as their property rights would be interfered with without any compensation.”
- Option 2. Hope value would be payable instead of marriage value.
“This proposal would reduce the current premiums payable, particularly for leaseholders with short leases.”
- Option 3. The current position is maintained, but when combined with other reforms, the scheme could still be used to reduce premiums. The other reforms may include a prescriptive premium calculation.
“The advantage of this option is that freeholders would not be as disadvantaged as with options 1 and 2, and the introduction of some tweaks may make it easier for people to know at the outset how much the purchase of their freehold or their lease extension will cost.”
“Inevitably there will be winners and losers in the proposals that the government ultimately decide to adopt.
“Option 3, whilst good for leaseholders and freeholders, would not be good for valuers.
“However, in our view, option 3 would be the best option for both leaseholders and freeholders, giving greater certainty to leaseholders whilst ensuring that freeholders are not deprived of their property interest without proper compensation.”
Kindly shared by Royds Withy King