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24/01/18

Pemberton Greenish secures leasehold enfranchisement success for landlord Sloane Stanley Estate in Court of Appeal case

Relativity – The Search for the Holy Grail Continues:  Mundy v The Trustees of the Sloane Stanley Estate (2018)

 

The Court of Appeal has today handed down its judgment in the above case which is of great interest to enfranchisement practitioners. It concerns one element of the statutory process for calculating the premium payable for an extended lease under Chapter II of the Leasehold Reform, Housing and Urban Development Act 1993 known as “relativity”.

Relativity is the relationship, expressed as a percentage, between the value of a leasehold interest for a given term and the freehold interest in respect of the subject premises.  A difficulty arises because the provisions of the 1993 Act require one to assume that there is no right to extend the lease whereas, in the real world, most leasehold interests can be extended.  Accordingly there is a dearth of market evidence to substantiate what the percentage relativity should be for these purposes.

In order to address the problem it has been customary for valuers to rely upon graphs, most commonly a graph produced by Gerald Eve, to ascertain the appropriate percentage relativity.  This practice was challenged by the tenant in this case who sought to rely upon an entirely new statistical model known as the Parthenia model.  Based on over 7,000 market transactions between 1987 and 1991 (and so prior to the 1993 Act which conferred rights to extend long leasehold interests), and applying a statistical technique known as hedonic regression, a graph was produced which suggested that the relativity shown on the Gerald Eve graph, as well as other graphs in circulation, produced a relativity which was too low with the result that premiums payable by tenants were too high.

After hearing much detailed evidence the Upper Tribunal, describing the Parthenia model as “the clock that strikes 13”, accepted the criticisms that were made of it and rejected it as an appropriate basis on which to ascertain relativity.  Although it was agreed on behalf of the tenants (in the three cases heard together before the Upper Tribunal) that a lease with the benefit of the right to extend is worth more than a lease which cannot be extended, the Parthenia model produced, in one of them, a figure for the latter which exceeded the former.  This problem also proved insurmountable in the Court of Appeal. Attempts to justify it were not well received.

Another issue on which the court opined, although it refused to give permission to appeal in respect of it, was the geographical extent of the statutory assumption that the 1993 Act confers no right to acquire any interest in any premises containing the tenant’s flat or to acquire any new lease. It was argued on behalf of Mr Mundy that this required a valuer to assume a “no Act world” in which there are no leases which have the right to extend. The Court of Appeal preferred the freeholder’s construction that the assumption extends only to the subject flat and the building in which it is situated.

The appeal has attracted a great deal of interest. How best to determine relativity has been a vexed question for some considerable time and, despite the exhortations of the Upper Tribunal, valuers have been unable to agree upon a single suitable graph to ascertain relativity for any given lease length. Although the Gerald Eve graph is not perfect, it has been accepted as the least unreliable method along with that promulgated by Savills which takes as its starting point the value indicated by a graph it has produced showing the relationship between a lease with the benefit of the right to extend relative to the value of the freehold interest (so called “real world relativity”), and then applying a deduction to reflect the assumed lack of any right to extend.

It remains to be seen what the Government will do as regards this legislation; enfranchisement has been specifically included in the Law Commission’s 13th Programme of Law Reform. For the moment, however, a method of determining relativity which is both reliable and easy to apply, the ”holy grail” in the words of Mr Justice Lewison, has yet to be found.