I read with interest the recent article suggesting that paying “marriage value” to freeholders was unfair to leaseholders when enfranchising their flats.
It is a ridiculous and self-serving argument. The author’s thesis ignores the inconvenient truth that a leaseholder does not own the land upon which the leasehold interest has been created. And more than likely, the freeholder did not intend to give ownership of the land when granting the lease in the first place.
There are three main alternatives available if one wants to occupy property. Purchase an outright freehold, or purchase a long lease, or pay rent on a short lease. The freehold provides the ultimate security, with the least security available from the short lease.
A long leasehold is simply the forward purchase of the right to occupy for the number of years of the lease. The long lease provides, for the length of the lease, equivalent security of tenure to that of the freehold, but not the reversion, and is acquired at a discount to the value of the freehold. Usually, the long leaseholder benefits from an implied discount on the rent that would otherwise have been paid over the years of a renewing short lease, in return for paying upfront.
The long lease therefore deliberately “sits between” the freehold and short lease tenure types, gaining some (though not all) of the benefits of both.
Looked at through this lens, I see no reason at all why it is “unfair” for the freeholder to participate in the growth in value that has occurred over the period of leaseholder’s tenure. It was the very principle of the arrangement; that the freeholder should get the property back at the end of the lease and be fairly rewarded for his equity interest when a new lease is granted.
The long leaseholder will have had the benefit of security of tenure for the period of the lease, and in many cases, will pay rent to the freeholder that does not in fact keep pace with inflation or property values, (for example rent reviews might occur only once every 25 years to a small proportion of the value of the property). The freeholder has forgone their right to occupation, and likely fair rental return over the period of the lease in return for the benefit of a capital sum up front, and the retention of the value of the reversion at the end of the lease.
The only way the freeholder can participate in the fair share of the equity growth in the interest over time if a new long lease is to be granted (now mandated by legislation) therefore is through participating in the so-called marriage value, (which is the difference between the unencumbered freehold value and combination of the value of the long lease and the reversionary interest).
Certainly then, the leaseholder should pay for this if only because they have not paid the full value on acquisition and have had all the benefits that the freeholder has not had during their occupation. In my view, the freeholder should have 100% of the change in the equity value of the land in question, but that ship has already sailed.
It is quite extraordinary in my view that this government should propose undoing property rights that have been in place and have been well understood for generations. There will be many serious consequences if they do. Certainly, they will harm capital values of freehold interests subject to a long lease and arguably some businesses will be destroyed. Just at a point in time when values are under pressure anyway because of increased interest rates and a lack of availability of debt finance.
Whilst I respond to the author of the article arguing marriage value is unfair, I also think it is fundamentally wrong that the government should propose the abolition of ground rents, to apparently be replaced by a peppercorn, without compensation for the freeholder, whom, as I have explained, actually owns the property.
Lest I am not accused of a dreadful landlord bias, there is one area where I agree with the government wholeheartedly. That is that the creation of leasehold structures for traditional housing estates (often in the North of the Country, and for quite low value property) absolutely must be stamped out. The housebuilders that entertained those schemes (easily found on a web search) have behaved very poorly indeed in my opinion.
The complete opposite of this poor behaviour seems to me to be the example of the way the major central London Estates have been run over many years. I cannot believe that no distinction is proposed if I read the proposals correctly.
The great estates as they are known, are considerable assets for society and the central London in particular, and it is here that many of the so-called “rich” choose to live and to spend huge sums of their money in London. To hand to these leaseholders a “bonus” of not having to pay ground to their owners, or indeed abolishing the payment of marriage value on a leasehold enfranchisement, is just as much a travesty as the imposition of increasing ground rents have been on those poor persons that thought that they had bought a house, to later find that they had only purchased the lease of one. I would dare to say that this never happens in central London where everyone is well advised.
Removal by legislation of the right to receive contracted ground rent for property (or abolition of marriage value payments from leaseholders to freeholders) would be nothing less than legalised theft.
That this could apparently occur and would benefit an already wealthy set of leaseholders in central London especially, to the detriment of landlords, some of whom are charities and the great families of our country, and all of whom attempt to do a very thorough and professional management job to maintain their estates, is simply unacceptable. I for one simply can’t understand how a government could act like this and potentially undo the very fabric of our society upon which it itself has benefited. And of course the consequences for ongoing international investment into our property markets are unspeakable.
If this proposed legislation goes through, one more considerable plank in the argument for property ownership in the UK has been chopped into pieces and is ready for the fire.
Many argue that Mr Gove has failed in his role in recent years. Failing to get houses built and to understand planning law (look up Marks and Spencer’s Oxford Street Planning application debacle) and now, potentially failing to understand property rights and the importance they have in the structure of our society, is less than we should expect from the average secretary, let alone a Secretary of State responsible for these things.
Presumably, he thinks that leaseholders will rush to vote Conservative in grateful thanks. I think the more thoughtful of them will realise that if they can’t trust a government with centuries of property rights, they can’t trust them with anything. The markets most certainly won’t like it.
The proposal to reduce ground to a peppercorn is intellectually flawed, and panders to the masses. Shame from the man that was once known as a government minister who actually had an intellect.
I hope that we can rely on the Lords to do their job and protect, for the sake of the country, a government that is losing its way.
