Outro 0:01
Welcome to the London property podcast, your go to source for navigating the complex and ever changing London real estate market. Our digital marketplace provides informative and educational content from industry leaders. Through podcasts and videos. We cover various aspects of the real estate experience, including buying and selling finance, law, tax construction, design, and more. Join us as we delve into the latest trends and developments in the market and gain valuable insights from our panel of experts.
Farnaz Fazaipour 0:32
Hello, and welcome to London property. I'm your host Farnaz Fazaipour. And today we're talking again to Justin Bennett of LBB Chartered Surveyors, and this time we're talking about what is marriage value. Welcome back to the show.
Speaker 1 0:47
Thank you for having me. So marriage value is essentially a term for comparing two interests. So in the leasehold enfranchisement situation, both parties you have a landlord has an interest and the tenant has an interest or the leasehold or freehold and the terminology is interchangeable. The once a property is in franchise, so the freehold is bought, only the tenant has an interest. But in in the case of a flats when a lease extension happens, both the tenant has an interest, they have the longer interest and the landlord has an interest but the reversion time when they get that property back is further away. So beforehand, the tenant has the short lease whatever meant that short leases, it has to be less than 80 years otherwise, marriage value is ignored. And the landlord, you know has an interest that's more valuable because they're going to get their property back sooner. And they may have or may not have a ground rent income during that period, which is the annual rent. So to work out the marriage value compare what both parties have after the transaction with what both parties had before the transaction? If there is a positive difference, that is the marriage value, and at the moment, the party's share that 5050.
Farnaz Fazaipour 2:10
And how does it work? With regards to the sort of formula that's used in leasehold reform? Well, the
Speaker 1 2:18
formula is no different to, you know, to commercial property, it is just a simple comparison. It's how you arrive to the figures that inputs into that very simple comparison that causes the controversy and the disputes that arise over the level of premium. Okay, so what you the premium is, is made up two parts essentially, I mean, there are other compensation or development value that may come into it. But essentially, it's two parts, what is the landlord have a moment you compare that with what they will have in the future. That is the landlord's loss that's often referred to as the diminution in value. So that's the first part that must be paid as the compensation because you're taking that away, then we look at is there any profit for both parties in this or for the tenant in particular, and that's the marriage value. And you compare the length of the lease the tenant will have with the value of the freehold and you compare the lease that they have with the value of freehold, this is what they call relativity. So this is the percentage difference between the value of a short lease and the freehold on extended lease. So typically, one would say, a lease over 130 years, doesn't matter if it's 999 Yours will be 99% of freehold value and it drops back from there and over time. Due to various cases, the relative value of shorter leases compared to freehold has fallen, which is why you may see higher amounts of merit marriage value, but in the marketplace, the relativity has also fallen, but that stems from how the landlord's loss of aversion is calculated. So, you know, if you go back to when the legislation was first introduced in 1993, we had, you know, transactions that are happening in the, in the real world, you know, especially in flats in you have to go back to 67 and 74, the original house enfranchisement, 74, I think, for the for the higher value properties, and the concept of marriage hottie coming into the calculation in a residential term, as I said, is, oh, it doesn't exist. It's just a reality. You know, if we have two vases, you know, you own one eye and the other we combine them together as an increase in in value because you've got the pair, then we share it, the increase 5050 then, you know, we could liquids in the suit, so it's a normal phenomenon and As the value of the interests are changing, so when we had this case called a RB, which reduced the discount rates, this was followed up by his mortality, which brought them up a little bit more. And then they reviewed, it ran the rest of the UK, there were other challenges to deal with obsolescence and real growth rates, but the basis is effectively sportily. But if you take central London, discount rates were 6%, before in the suburbs that was seven or 8%. And then everybody is moving to 5%. For flats, everybody's premiums went up overnight. So if you're buying a short lease, you're gonna pay me less within the knowledge that the premium is higher. So the market relativity drops. So that means that you then shift towards the statutory assumption. And the statute says that you're the only lease in the market that cannot extend your lease or buy your freehold, which means that you will discount that market relativity to get to your statutory relativity. And progressively over the years, you have a situation where now, these new discounted, relativity is deriving from the new market is increasing the cost of premium, because it increases the amount of marriage. So you have this doubling effect, which is leading to the call for reform to reduce the cost of premiums.
Farnaz Fazaipour 6:35
Right. And then you just mentioned that the houses were from the 1967 Act. So there's a difference in the way that the legislation handles the extension of houses when it comes to value versus flats,
Speaker 1 6:49
or the extension of the house, you have to it's a very small group, it's a 50 year extension at a at a more modern ground rent. And those generally applied to the lower value houses. And generally, it's only those who cannot afford the premium, that will extend the lease. And the premium is much less than the premium for a lease extension where marriage value is involved. Because you assume a 50 year extension inside when you're doing the calculation. And what about tenant improvements, or tenants improvements are disregarded if they're done by the terms or the duration of the lease. And that applies to in both circumstances, there are technical differences, but you know, they are very technical.
Farnaz Fazaipour 7:35
So can you just clarify to us? What are the proposed changes to marriage value,
Speaker 1 7:40
and total abolition, the removal of it from the equation. So essentially, say, from now on, already pays the landlord's loss, which means that you've got an automatic shift in value from one party to the other. So going forward, the cost of a lease extension will be cheaper. But the only person gaining is the existing lease lease holder. So if you own a flat at the moment, you gain the benefit of this, and nobody else, because the person, you can either choose to take advantage of the the cheaper lease extension to complete your lease extension or in franchise one. Or you can choose to sell your flat to somebody else at a higher price. Because they will pay more in the knowledge that they will pay less for a lease extension. So it's literally a shift from one party to the other end value.
Farnaz Fazaipour 8:37
And what impact do you think that's going to have on valuations? Um, well,
Speaker 1 8:42
in terms of my professional day to day life, it's it's cool, cause that high heat or high hiatus and you you know, you've had a period where people have said, Oh, it's gonna come through very quickly. But as the legislation is going through Parliament, Parliament, the bill is growing in length, it's gone from 100, and page 40 pages to 196 pages already. There are rafts of amendments, I think they're up to 120 amendments now 123, I think precisely as of this morning, and the latest publication was the 21st. And, you know, the committee finished, you know, over a week ago, and it's going into Parliament's for a third reading on the 23rd, then it goes off to the House of Lords, who knows whether the what we're actually discussing right now will be what exists. And we don't know if another bit of turmoil would hit the government, and they'll decide to call a snap election which will just freeze it in its tracks in any event. And in terms of the valuation implication of this legislation, we will never know what the valuation implication is, even if it is enacted until the Secretary of State says these are prescribed rates that we're going to put it into this valuation because if they use the same discount rate from the green book that they used in their own impact assessment, the cost of a lease extension for the typical person will increase with even without marriage value. And that's the key to this, that, and this is where so you've had this drive, particularly before the bill was published, where there was a lot of advocation of the use of a three and a half percent, to basically leave things alone. The, you know, if you left the rates together the as they are, and left and remove the marriage value, the premiums would be cheaper. The four mathematically for the difference between a 90 year lease extension and then the 9990, or this extension they're proposing is the premium would go up if marriage value exists, because your landlord has no future interest that they have no.
Farnaz Fazaipour 10:51
Gosh, so watch this space. And you know, God knows, we'll forget a new government what will happen and also if it passes, you know, there's going to be a lot of people who will want to challenge it,
Speaker 1 11:02
there's there'll be challenges. And ultimately, it will come down to what rates are put into the calculation to tell you and the evidence that I put into the committee has a graph inside the evidence that says this is what happens at certain different rates. And if you left the rates alone, and just and left marriage value in, you can increase the cost. Justin,
Farnaz Fazaipour 11:25
thank you very much for talking to us. Again, it was really interesting conversation and we look forward to having you back. And if you have any questions to do with marriage value or anything else to do with the leasehold and freehold bill, then please do get in touch with us, and we will guide you in the right direction.
Outro 11:41
Thanks for tuning into our latest episode of the London property podcast. Head over to our website where you can browse our exclusive network of top experts driving the market. As a member, you'll have direct access to our experts and their networks. Our award winning content will help you choose the right professionals for your needs, and make informed decisions about your investments. personal recommendations are a powerful tool and connecting with trusted professionals. Let us introduce you to the right people to help you achieve your real estate goals. Contact us now to learn more about becoming a member and gaining access to these valuable resources or joining our directory of experts.
Transcribed by https://otter.ai