What The Leasehold 80-Year Rule And Marriage Value Mean For You2nd Nov 2018
Eighty years is a crucial milestone for a residential lease – it can mean thousands of pounds of financial losses, savings or gains for leaseholders and freeholders (depending on their circumstances).
When a lease falls below 80 years, the freeholder is entitled to a payout if the value of the property is increased by a lease extension or freehold purchase.
- bad news for the leaseholders because it will cost them more to buy the freehold or extend the lease
- good news for the freeholder because they could be paid thousands of pounds by each of the leaseholders at the block.
It all depends on something called the ‘marriage value’…
What Is The ‘Marriage Value’?
When someone buys the freehold or extends the term of their lease, they are increasing the value of the property.
That value is down to two factors: the property itself (bricks and mortar) and the length of the lease.
Here’s the thing: the ‘marriage’ of bricks and mortar plus lease length can create a value that is greater than what it would be if these two factors were considered separately then added together.
Put very simply, think of this value as the sum of the whole being greater than its parts. Think of it as ‘one plus one equals three’.
And the marriage value is the difference between the ‘one plus one equals two’ and the ‘one plus one equals three’.
Under the Leasehold Reform, Housing and Urban Development Act 1993, the freeholder/landlord is entitled to 50 per cent of that marriage value – but only if the lease has fallen below 80 years.
Who decides this ‘marriage value’? This is a matter of negotiation between the leaseholders and the landlord. Both sides will employ experienced leasehold property valuers.
What if the leaseholders and the freeholder can’t agree a value? The case can go before the First-tier Tribunal (formerly the Leasehold Valuation Tribunal) for a decision but this can be costly.
So it is much better for all concerned if they can reach an amicable agreement.
Key Trigger Point: Selling A Leasehold Flat
At some point a leaseholder may need to sell their flat and move. That will be much harder (or even virtually impossible) if their lease has fallen significantly below 80 years.
This is because mortgage lenders don’t like to lend on shorter leases. Even 80 years is considered ‘short’ by some lenders – despite the lease probably having been only 99 years when new!
So prospective buyers won’t be able to get a mortgage. And the leaseholder won’t be able to sell. They risk being ‘trapped’ until they decide to extend the lease or buy the freehold.
It’s up to the leaseholder to act swiftly – while it is cheaper to do so. But the freeholder may prefer it that they don’t. They may want the lease to drop below 80 years so they can get a marriage value payout.
Generally speaking, the longer the leaseholders leave it, the more expensive the process will be for them in the long run.
Again, generally speaking, the longer the issue of ‘below 80-year’ lease length is ignored or postponed, the more money the leaseholders will lose and the more the freeholder will make.
Values/Valuations: Very Important – Please Note
It is important to note that we are solicitors – not valuers, chartered surveyors or estate agents.
We can comment about the impact of the 80-year rule on values in general terms but we cannot give specific valuations. For this you will need an experienced professional valuer.
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