At What Point Should You Extend A Lease?

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Is Extending My Lease Now Cheaper Due to the Abolition of Marriage Value?

Ed Magnus of This is Money responds: Many leaseholders are likely assessing how the recent Leasehold and Freehold Reform Act will impact their decisions. The abolition of marriage value could potentially reduce the cost of extending a lease, but it’s essential to understand how these changes will specifically affect your situation. Consulting with an expert could be beneficial to make an informed decision.

The recent changes should benefit leaseholders by making it cheaper and easier to extend leases or purchase a share of the freehold.

For instance, leaseholders will no longer need to cover their freeholder’s costs when requesting a lease extension.

The legislation, which received Royal Assent on 24 May under a fast-track process known as ‘wash-up’, also includes the removal of marriage value. This previously led to significant increases in the cost of extending leases on properties with less than 80 years remaining.

Marriage value is the added value of a property resulting from extending the lease, reflecting the combined interests of the leaseholder and freeholder. Under the new law, no marriage value will be applicable if the remaining lease term is over 80 years.

When a lease falls below 80 years, the marriage value is divided equally between the leaseholder and the freeholder.

In practical terms, this means the leaseholder pays half of the marriage value to the freeholder as part of the total premium for extending the lease.

Marriage value is calculated by assessing the combined value of both the freeholder’s and leaseholder’s interests with an extended lease, then subtracting the current lease’s value.

However, a standardised valuation process is needed to understand the exact impact of removing marriage value on leaseholds. Experts suggest that establishing this could take several years.

For further insights, we consulted Henrietta Hammonds from the Association of Leasehold Enfranchisement Practitioners (ALEP), Linz Darlington of Homehold, and Timothy Martin from Marr-Johnson & Stevens, specialists in leasehold valuation.

Has anything yet changed for leaseholders?

Timothy Martin comments: While the Act has been passed, the changes aimed at making lease extensions cheaper have not yet been implemented. They are expected to come into effect around 2025 or 2026, or possibly later.

Key changes include a cap on ground rents, the removal of marriage value, fixed capitalisation and deferment rates, and the removal of the requirement to cover the landlord’s costs.

The situation is complicated by the recent change in government and the potential challenge to the Act by landlords on human rights grounds. It’s unclear whether this challenge will proceed or how the new Government will address it.

Currently, there is little practical change from the Act, and the timing and details of the new valuation provisions remain uncertain.

What is marriage value?

Linz Darlington explains: When extending a lease, you will need to pay a ‘premium’ to the freeholder. This premium covers the cost of extending the lease term and also buys out any future ground rent payments.

Typically, flats with shorter leases are valued less than those with longer leases. Extending your lease generally increases the property’s value, even when you factor in the associated costs.

Under current leasehold laws, if your lease has less than 80 years remaining, you are required to share half of the increase in value—known as marriage value—with the freeholder. This is in addition to the premium paid for extending the lease. This arrangement ensures that the financial benefits of extending the lease are split between you and the freeholder.

Is marriage value being abolished?

Henrietta Hammonds clarifies: Marriage value isn’t being entirely abolished. Instead, the new legislation changes how it is handled. Previously, when extending a lease, the tenant would pay 50% of the marriage value to the landlord.

Under the new rules, the tenant will keep the full amount of the marriage value, with no share going to the landlord. This means that tenants will benefit from the entire marriage value when extending their lease.

When will leaseholders know more?

Henrietta Hammonds comments: At this stage, the complete details are not yet clear. While it’s confirmed that tenants will no longer need to pay marriage value to the landlord, the exact implementation date is still unknown.

Certain aspects of the valuation, such as capitalisation and deferment rates, will be set by the Secretary of State. However, we don’t have information on the specific levels or timing of these rates. These rates significantly impact the lease extension premium, and even small changes can have a big effect.

The basic process for extending a lease with a single landlord remains similar to before, but changes in these rates and the elimination of marriage value will alter the costs involved.

Timothy Martin adds: The uncertainty lies in the rates the Government will set for valuing ground rent and discounting the reversion. Generally, lower rates lead to higher costs for the new lease, while higher rates reduce the cost. Until the Government announces these rates, it is impossible to predict the exact price of a lease extension. Once determined, these rates will remain fixed for 10 years.

What could the future changes to marriage value potentially mean for leaseholders?

Linz Darlington says: Leaseholders with leases under 80 years will likely see significant benefits from the abolition of marriage value. If the costs for extending the lease and buying out the ground rent stay the same, removing marriage value could lower the cost of extending a lease by about 33% to 50%, depending on various factors.

Generally, as a lease shortens, the proportion of the flat’s value gained from extending the lease decreases. This is because buying additional years is more costly for a short lease compared to a longer one, though this can vary if there is a high cost to buy out the ground rent.

There is also a chance that the Government may adjust the rates used to calculate the cost of extending the lease and buying out the ground rent. If these rates change, they might reduce some of the benefits from the abolition of marriage value for leaseholders with leases under 80 years. Conversely, it could make extensions more expensive for those with leases over 80 years.

Henrietta Hammonds adds: The impact of removing marriage value could be significant, but it is not guaranteed. The effect depends on the deferment and capitalisation rates, which influence other parts of the premium. Higher rates generally lead to lower premiums, while lower rates can increase premiums.

If the Government raises these rates, premiums could decrease further. However, if the rates are lowered, premiums might go up. It’s possible that premiums could be higher than before, even without marriage value being payable, though this outcome seems unlikely. Both lessees and landlords should consider this risk when evaluating their options.

Do those with the shortest leases stand to benefit the most?

Henrietta Hammonds says: It’s challenging to provide a general answer because each lease and property is unique. Generally, the shorter the lease, the higher the premium you will pay to the landlord.

Marriage value tends to be highest for leases between 25 and 45 years, but as a percentage of the overall premium, it is usually greatest for leases between 60 and 79 years. For example, if you extend the lease on a flat valued at £500,000 with a very long lease and a peppercorn ground rent, the marriage value for a 79-year lease would be around £17,000 out of a total premium of nearly £28,000, making up 61% of the premium.

In contrast, for the same flat with a 25-year remaining term, the marriage value would increase to £61,500, which is just under 30% of the total premium of £207,000.

Timothy Martin adds: The removal of marriage value will mainly benefit leaseholders with leases under 80 years. The impact on the overall price varies: marriage value is highest when there are about 35-40 years left on the lease and decreases for both shorter and longer leases.

What’s your advice to leaseholders like our reader?

Timothy Martin says: The benefits of the Act will depend on factors such as ground rent levels, the remaining term of the lease, and the rates set by the government. Leaseholders should consult a qualified valuer before making any decisions.

Generally, if your lease has less than 25 years or more than 85 years remaining, there’s little advantage in waiting. For leases with between 25 and 85 years left, it’s usually better to wait until more details are available. However, if you prefer not to wait, you can still proceed with your claim, but it will be under the existing rules.