We have been promising to explain why the concept of ‘Marriage Value’ is important and why residential leases are said to be short when there is a term of less than 80 years remaining. Thanks for your patience; we are nearly there now!
Before we get there we’ll just recap some of the points we’ve been looking at in previous posts. Most leaseholders of residential property are entitled to claim a new lease under the terms of the Leasehold Reform Act. This will be for the balance of the existing term plus a further term of 90 years. The new lease is on the same terms as the old lease; the only important difference is that the new lease is at a ‘peppercorn’ rent (which means effectively no rent). Obviously, the lessee benefits from the grant of the new lease, whilst the landlord (freeholder) is disadvantaged. The Leasehold Reform Act contains a mechanism for calculating how the landlord should be compensated financially. When the new lease is granted the lessee will have to pay the landlord a sum of money. This is known as a premium.
The Act states that the following factors must be taken into account in calculating the premium.
We will concentrate in this post on explaining how the landlord’s share of the marriage value is calculated and leave the other areas for a later post.
As we saw in the last blog, the ‘Marriage Value’ is basically the difference between the combined value of the freehold and leasehold interests in a property with a new ‘long lease’ and with the original ‘short lease’.
As the lease term reduces the value of the leasehold interest in a flat declines. If we assume that the original lease was for 99 years the decline in value in the first few years will be quite small. A flat with a 90 year lease will be worth almost as much as one with a 99 year lease. However, as time goes on the difference grows. For example a flat with a 50 year lease would only be worth about 70% of what it would have been worth with a 99 year lease.
Peter Barry Surveyors undertake lease extension valuations throughout Greater London including the popular areas of Muswell Hill N10, Crouch End N8 and Islington N1. We are always happy to provide follow-up advice and if required we can negotiate with the other party’s surveyor to reach an agreement.
As the value of the flat decreases the difference between the value with a long lease and short lease grows, i.e. the ‘Marriage Value’ gets bigger. The Leasehold Reform Act says that the Landlord is entitled to a share of the ‘Marriage Value’ when the new lease is granted. This share is actually 50% which means that the increase in value is shared equally between the lessee and the landlord. How the share was divided used to be a matter for negotiation, but it is now fixed at 50%.
Now to finally explain why 80 years is such a magic figure. The reason is quite simple. The Leasehold Reform Act says that if the original lease still has 80 years or more to run then the ‘Marriage Value’ is automatically zero, which means that no element of Marriage Value is taken into account when calculating the premium due to the landlord. This is why it is important for lessees to consider applying for a new lease whilst there is still more than 80 years of their existing lease still to run. Ideally the initial application should be made when there are still 81 or 82 years on the lease to make sure that all the necessary formalities can be completed well before the 80 year cut off point.
In the next blog we will try to explain how ‘The diminution in value of the freeholder’s interest in the subject property’ is calculated. Once we have covered all the basic concepts we will talk about some actual cases and show how the premium due to the landlord was calculated.