In my last leasehold post we said that we would try to explain the implications of the Leasehold Reform Act in as simple terms as possible. We thought that the best approach would be to start by defining some of the terms that we will be using and the first one that springs to mind is ‘Marriage Value’.
Marriage Value may be described as ‘the additional value generated when an enfranchising leaseholder owns both the leasehold and freehold estates. The value of the leasehold and freehold estates in separate ownership is less than in common ownership, as the leaseholder is considered to be a ‘special purchaser’ who would be prepared to pay more than an investor for the freehold.’
The concept of marriage value applies both to applications for a new lease and the collective purchase of the freehold interest. It will probably be easier to explain the concept of marriage value by using figures from one of our recent cases as an example. The property in question was a flat in North London that had an existing lease of slightly less than 73 years and the lessee had applied for a new lease under the terms of the Leasehold Reform Act. The Act provides that the new lease will be for a term equal to the unexpired term of the existing lease plus a further 90 years. In this case it meant that the new lease would be for a term of 163 years.
The first aspect that we had to consider was the value of the leasehold interest with the existing lease and the value of the leasehold interest with the new extended lease. The existing value was £315,000 and the value with the extended lease was £330,000. This obviously reflects the fact that a purchaser would pay more for a flat with a 163 year lease than they would for a flat with a 73 year lease.
I then had to consider the value of the freehold interest both with the existing lease and a new extended lease. The value of the freehold interest is based on the premise that the property will revert to the freeholder when the lease expires. In this particular case the lessee also had to pay annual ground rent to the freeholder and this right to receive rent is also reflected in the value of the freehold interest.
When a new lease is granted under the terms of the Leasehold Reform Act the new lease is at a ‘peppercorn’ rent and this means that effectively the freeholder receives no rent.
In this case the property would have reverted to the freeholder in 73 years time if the lease was not extended and, together with the right to receive the rent included in the lease, this meant that the present value of the freehold interest was approximately £7,000. Once the lease was extended the freeholder would no longer receive rent and the property would not revert to the freeholder for 163 years. With the extended lease the freehold reversion was only worth £250.
The total value of the property is the sum of the freehold and leasehold interests. With the existing lease the total value is £315,000+£7,000=£322,000. With the extended lease the total value is £330,000+£250=£330,250.
From this it can be seen that the total value of the property with the new extended lease exceeds the total value of the property with the existing lease. The difference in value in this particular case was £330,250-£322,000=£8,250. It is this difference that is referred to as the ‘Marriage Value’.
In our next blog we will explain why the Marriage Value is important and also give some insight into the reasons why it is important for lessees to consider renewing their leases whilst the unexpired term of the existing lease is still more than 80 years.