A wedding gift for the wealthy?

Damian Greenish takes a look at hope and marriage values under the leasehold reform legislation. When the government decided in 2018 that we needed another round of “leasehold reform”, it asked the Law Commission to carry out a wide-ranging review of the current law and to produce recommendations for change. An element of the terms of reference was to examine the options “to reduce the premium (price) payable by existing and future leaseholders to enfranchise their homes, whilst ensuring sufficient compensation is paid to landlords to reflect their legitimate property interests”. In its subsequent report to the government in 2020 (Leasehold home ownership: buying your freehold or extending your lease, Law Com No 387), one of the options put forward by the Law Commission was to remove marriage value from the statutory valuation scheme. That was an option accepted by the government, and the Leasehold and Freehold Reform Bill, introduced into the House of Commons in November 2023, provides for that. It is worth noting that, as part of its work, the Law Commission obtained advice from Catherine Callaghan KC on the compatibility of such a provision with Article 1 of the First Protocol to the European Convention on Human Rights. Her conclusion was that compatibility with A1P1 was “finely balanced”, although “marginally more likely than not” to be compliant. As she put it, such a scheme which excludes marriage value “does not reflect the true market value where the leaseholder is in the market”. There was little, if any, serious debate on this proposal during the Bill’s hurried passage through the House of Commons. However, on looking through the report of the second reading of the Bill in the House of Lords, it was refreshing to read a more balanced debate on the subject, with peers beginning to question whether, by removing marriage value, landlords will in fact be properly compensated for the loss of their legitimate interests. Nevertheless, even there, there were some rather peculiar ideas about what “marriage value” is. To take just one example, it was described as an “outmoded concept” which is “based not on what a property is currently valued at but on what a freeholder imagines it may be worth in the future”. Marriage value and hope value In simple terms, marriage value arises where the sum of the parts is worth less than the whole. Applying that principle to the world of leasehold, if (i) the landlord’s interest in a property, with vacant possession, is valued on the market as £A, (ii) the landlord’s interest subject to the lease as £B and (iii) the leaseholder’s interest (ie the lease) as £C, then £A will be greater than the aggregate of £B+£C. It is that difference which is the marriage value. The analogy used by the Law Commission is a pair of Chinese vases. As a pair, they are worth more than individually. The amount by which they are worth more as a pair is the marriage value. Hope value simply reflects the possibility of future marriage value. It follows that, without the prospect of future marriage value, there can be no hope value. There is nothing new about this valuation principle, which existed in the real world long before leasehold enfranchisement became widespread. Indeed, as the Law Commission put it in its report, the existence of marriage value is an observed fact. It applies where a leaseholder buys out the landlord’s interest or where a landlord buys out the leaseholder’s interest. It is only in those circumstances that the interests can be “married” and the marriage value thus released. The history of the leasehold reform legislation shows that marriage value has for some 50 years been accepted as part of the landlord’s legitimate property interest. Even when the original Leasehold Reform Act 1967 (which had only limited application to homeowners of low-value houses) was passed, marriage value was not excluded from the valuation (although that had not been the government’s intention and was reversed by an amendment in 1969). However, the 1967 Act, despite being passed to help ordinary homeowners, particularly in South Wales, is notorious for the consequence that those who derived the most benefit from it were the wealthy leaseholders of prime central London. Enfranchisement rights for houses were extended by the Housing Act 1974. Although the legislation was introduced by the then Labour government, it only got through because the opposition Conservative Party supported it on the strict condition that the enfranchisement price should reflect the true value of the landlord’s interest – by including marriage value. When collective enfranchisement of blocks of flats and extended leases for individual flats were introduced in 1993, there were some rather half-hearted attempts to remove marriage value from the valuation, but the main arguments were over the split rather than the principle. Marriage value was therefore included, with just the split being left to argument. In 2002, the issue of marriage value was again raised, but the then Labour government was firm in its response: “We share leaseholders’ concerns about the cost of enfranchisement but also recognise landlords’ legitimate interests. We consider they are entitled to a fair market price including a share of any marriage value.” Nevertheless, the provisions relating to marriage value were then modified by specifying that (i) the landlord’s share of marriage value should be limited to 50% (which pretty much reflected market practice) and (ii) if a lease had an unexpired term of more than 80 years then the amount of marriage value would be deemed to be nil. That latter provision was not uncontroversial. The reason behind it was that it was thought that, at more than 80 years unexpired, the merging of the two interests was not likely to add much in the way of value. However, that was not true for higher-value houses and flats, where there is often significant marriage value. It followed that, once again, the principal beneficiaries of the government’s largesse were the wealthy leaseholders of high-value properties in prime central London. What will reform achieve? The current position is that (i) marriage value is payable in cases only where the lease has an unexpired term of less than 80 years and (ii) where it is payable, only 50% is paid to the landlord. How many people are therefore affected by this? The answer is, not that many. According to the government’s impact statement published with the Bill, there are approximately 4.98m leasehold properties in England, of which only 385,400 have an unexpired term of 80 years or less. It follows that less than 8% of leaseholders in England are currently liable to pay marriage value. Who and where are they? Research shows that 80% of the value of marriage value transfer will benefit leaseholders in London and the South East; that more than 60% of leasehold properties in London and the South East are held not by owner/occupiers but by investors; that 28% of all of England’s marriage value will be concentrated in just three London boroughs (Westminster, Camden and Kensington & Chelsea) and that, in London, between 10% and 25% of marriage value transfer is likely to be enjoyed by overseas owners. Although the government talks about the “abolition” of marriage value, that is not what it is. No longer sharing marriage value is not abolition, but simply gifting leaseholders a one-off windfall profit by a transfer of that marriage value, estimated by the impact statement at £7.1bn. It follows that the principal beneficiaries of this windfall will, once again, be the wealthy leaseholders of high-value properties in prime central London. Is that really the government’s aim? A simple get-out for the government would be to restrict the so-called “abolition” of marriage value to those leases which, at the date of the Bill, have an unexpired term of more than 80 years, so that such leaseholders would never have to pay any marriage value, even when their term dropped below that. That way, (i) more than 92% of leaseholders would be relieved from the prospect of ever having to pay marriage value and (ii) the wealthiest and least deserving leaseholders will not receive a windfall bonus. In winding up the debate on the second reading, Lady Scott for the government dismissed any suggestion of retaining marriage value. She suggested that the government’s wider reforms “will ensure that sufficient compensation is paid to landlords to reflect their legitimate property interests”. It is not immediately obvious what they might be, although she did make clear again, when talking about prescribed capitalisation and deferment rates, that the government intends to “set the rates at market value to ensure that the amount landlords are compensated reflects their legitimate property interests”. That presents a bit of a dilemma. The general view is that a deferment rate now would be something less than the current rate. However, the lower the rate, the higher the price – but, as pointed out by Callaghan, the further the rate departs from the market, the greater the risk of a successful A1P1 challenge. It will be interesting to see how the government squares that circle. Damian Greenish is a consultant in property litigation at Forsters Photo © Araxhs/Pixabay