If you own a flat with a short lease, whatever it is worth now it will jump up in value if you ever extend the lease. On paper at least, you should make a profit.
If your lease has fewer than 80 years remaining at the point you extend it, you must share half of that hypothetical profit with your freeholder. This is known as “Marriage Value.”
My view (keep reading!) is that Marriage Value is deeply unfair to leaseholders. I want to believe Michael Gove agrees with me, which is why he is so keen to abolish it with the Leasehold and Freehold Reform Bill.
Yet, a more sceptical part of me thinks he is walking a careful line. A line which on one side has five million+ leaseholders holding ballot papers. On the other are freeholders who Gove thinks can be convinced that reform under Conservatives might be less damaging to them than the more radical promises of leasehold abolition by Labour.
What is marriage value?
To understand marriage value, you first need a grounding in how lease extensions are calculated.
All lease extensions (even when above 80 years) require a payment to the freeholder, and this has two components.
The first component is to buy the extra years.
Imagine you have a £200,000 flat with 80 years left on the lease, but you want to extend it. You need to compensate your freeholder for the fact they won’t get the flat back in 80 years’ time.
If you deposit £4,000 in the bank at 5% it will grow over time. Leave it there for 80 years and it will be worth about £200,000. For this reason, it is considered that a payment of £4,000 now is the equivalent to £200,000 in 80 years. £4,000 is what you’d need to pay your freeholder for the additional 90 years you’re currently entitled to.
Since a Court of Appeal decision known as Sportelli in 2007 this 5% “Deferment Rate” has been used in most lease extension calculations. I’ll come back to this later.
The second part of the payment is to “buy out” your ground rent.
Under current legislation you won’t pay any ground rent once you’ve extended your lease. A payment is required to compensate your freeholder for the fact they won’t receive your annual ground rent cheque.
Like above, each of the future payments is discounted: money now is worth more than money in the future. This time the rate is called the “Capitalisation Rate.”
Getting to the point, if your lease is below 80 years your lease extension premium will include a third payment – Marriage Value.
The cost of the payments for the extra years and the ground rent should be more than offset by the increase in value of the flat when you extend the lease.
That hypothetical profit is known as Marriage Value. It is called that because it is created when you “marry” the existing lease term with the additional 90 years.
