Many flat owners will be aware of the importance of extending their lease before it gets too short. Some might already be aware that they have a statutory right to extend their lease, so long as they have owned the flat for at least two years. By serving a notice on their freeholder, under Section 42 of the Leasehold Reform, Housing and Urban Development Act 1993, the flat owner can demand to have 90 years added to the existing unexpired term and the ground rent dropped to zero. They might not realise that letting their lease drop below 80 years unexpired can have a drastic effect on the price payable for the extension. Overnight, thousands of pounds can be added to the cost.
The sums change. The 1993 Act dictates how the price is calculated. If, at the time the Section 42 notice is served, the lease has dropped below the 80 year threshold, an extra component must be paid by the leaseholder. That component is “50% of the marriage value” and it can be a very significant extra component – sometimes doubling the price of the extension.
What is marriage value?
It’s the hidden value element which arises when the lease extension takes place. To explain in more detail, imagine the situation before the extension is done. There are two assets: the lease of the flat and the freeholder’s reversionary interest (basically the freehold title). Each of these two assets can be valued; the 1993 Act sets out how these are valued and case law developed over many years tells surveyors exactly how it should be done. Add these two values together and we get a total: A.
Now imagine the situation after the extension has taken place. Again, value the two separate assets in accordance with the law. Add these two values together and we get B.
You might logically think that A would equal B. Value has moved from the freehold to the leasehold asset but the sum total remains the same, surely? Not so. B will be higher than A. Additional value has been created by “marrying” the leasehold and freehold assets. This happens across the board, whatever the length of the lease at the start of the process. But the law says it can be ignored if the unexpired term is greater than 80 years at the time the Section 42 notice is served.
What do I do if my lease is approaching the 80 year threshold?
Act fast! Get in touch with us and we can get to work on your lease extension. The key requirement is to get the Section 42 notice served. This “stops the clock” by freezing the valuation date – the date used as the basis of valuation throughout the process. Even if the extension completes many months later the important target is get the notice served before crossing that 80 year threshold.