As the Government seeks to make it easier – and cheaper – for leaseholders to extend their leases, it seems that ‘marriage value’ may become a thing of the past as a part of the valuation process for residential lease extensions.
Such a move is likely to disappoint and frustrate residential Landlords/Freehold owners - but go a long way to appeasing the long-held complaint of residential leasehold property owners that they have to pay over the odds for a time-limited asset.
Following the Law Commission’s public consultation last year on wide-ranging reforms to the leasehold enfranchisement sector, the Law Commission has this week published its “Report on options to reduce the price payable” which sets out “… the options for wholescale reform of the valuation regime in order to reduce enfranchisement premiums for leaseholders whilst ensuring that landlords receive sufficient compensation.”
Leasehold enfranchisement is the process for people who own property on a long lease (“leaseholders”) to extend the lease, or buy the freehold. In order to exercise enfranchisement rights, leaseholders must pay a sum of money (“a premium”) to their landlord.
Leaseholders object strongly to the costs involved in extending their lease. Many see it as unfair that they have had to buy a time-limited asset and must pay a further sum of money to a landlord, in addition to the original purchase price, to protect their asset’s value.
The Government wants to analyse the valuation process and the Law Commission’s Report is designed to enable Government and Parliament to decide whether reform is needed, and how premiums should be calculated.
The cost of many leaseholder’s lease extension is so high because of something called “marriage value”, which equates to the increase in the value of the property once the lease has been extended, reflecting the additional market value of the longer lease.
Currently, marriage value is applied if there are 80 years or less left to run on a lease. Thus, those lease with less than 80 years remaining are more expensive to extend than those with more than 80 years remaining.
The Law Commission’s report sets out three alternative schemes for a new regime to calculate premiums. Within each of the schemes is a series of further sub-options for reform; two schemes abolish “marriage value” entirely.
This is a hot-topic given that a number of property developer landlords have come under fire for the escalating ground rents that are contained within leases that are stinging leaseholders.
The very concept of leasehold ownership has been labelled as unfair on leaseholders and many have called for wholesale change; it appears that the Government is willing to listen, although some commentators are already suggesting that the proposals amount to no more than ‘tinkering’ rather than full scale reform.
The freeholder's view
Of course there are two sides to every story, and freeholders take a different view: many believe the value - or at least some the value - of their asset is in the premiums paid to extend these leases, and that leasehold interests are sold at a value which reflects the time limited nature of the asset. From their perspective, the effect of the proposals is to devalue the freeholder’s asset for the benefit of leaseholders which many freeholders consider to be unfair. Some would also argue that this is not something which Parliament should be entitled to legislate to affect.
The full report can be found here: https://www.lawcom.gov.uk/project/leasehold-enfranchisement/
This is not the end. The Law Commission will be publishing further reports in the near future that will address all other aspects of a reformed enfranchisement regime, the right to manage, and the reform of commonhold as an alternative to leasehold.