On 24 January 2018 the Court of Appeal dismissed the leaseholder’s appeal in Adrian Howard Mundy v The Trustees of the Sloane Stanley Estate, which involved a lease extension of a flat in Chelsea with 23 years left to run.
The case has attracted significant media attention as it concerned a new method for calculating ‘relativity’, which campaigners had hoped would significantly reduce the cost to leaseholders of extending a lease under the Leasehold Reform, Housing and Urban Development Act 1993 (“the Act”).
One of the components of a lease extension premium is ‘marriage value’, which represents the difference between the value of the landlord's and tenant's interests in the flat, before and after the grant of the new lease. ‘Relativity’ is a valuation concept used in the calculation of marriage value that measures the relationship between the value of a lease with and without the benefit of enfranchisement and lease extension rights.
Calculating relativity is a complex process undertaken by specialist valuers and is generally calculated by reference to ‘relativity graphs’, which are based on agreed premium settlements.
In 2016, the leaseholder in Mundy challenged the current methods in use and, in particular, the widely accepted ‘Gerald Eve’ graph created by surveyors more than 20 years ago. Instead, a new statistical model known as the ‘Parthenia’ model was presented to the Upper Tribunal as the only reliable way of measuring relativity fairly. The Parthenia model is based on a statistical technique called hedonic regression analysis and is based on transactions which took place between 1987 and 1991, before the Act came into force, with the objective of eliminating the effect of the Act on relativity.
However, the Court of Appeal rejected this challenge and upheld the decision of the Upper Tribunal, which had found the Parthenia model of relativity to be defective as it produced an impossible result (described by the UT as “a clock which strikes 13”), namely that the value of a lease without rights under the Act had more value than a lease with rights under the Act, despite it being accepted that rights under the Act had value.
Although this decision may be disappointing to leaseholders, there are expected to be changes to the process by which residential leases are extended and the premiums calculated. In his judgment, Lord Justice Lewison noted that the Government had invited the Law Commission to consider whether the valuation process could be made simpler, so it may be that “the holy grail will one day be found” and lease extensions will become cheaper for leaseholders.
Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.
For further information, please contact Kenny Friday