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A search for the "Holy Grail" valuation graph continues

  • United Kingdom
  • Real estate dispute resolution
  • Real estate planning
  • Real estate sector

29-01-2018

On 17th January 2018 the Court of Appeal dismissed a leaseholder’s appeal relating to the Upper Tribunal’s decision as to how one of the components of a valuation for a lease extension or collective freehold enfranchisement should be calculated for flats with a lease term that has fallen below 80 years.

The decision, in the case of  Mundy v The Trustees of the Sloane Stanley Estate, is disappointing news for leaseholders but will no doubt be welcomed by landlords who will continue to benefit from the current position the Court of Appeal upheld.

Background Law

Under the Leasehold Reform, Housing and Urban Development Act 1993, a qualifying leaseholder of a flat is entitled to extend the term of their lease by an additional 90 years at a peppercorn ground rent by paying a price determined in accordance with the 1993 Act.

One of the valuation components considered when calculating a lease extension or collective freehold enfranchisement price for flats with less than 80 years left of the lease term is “relativity”. Relativity is the difference between the value of the leaseholder’s unexpired current interest in the flat compared with the freehold value of the same flat.  For example, if the unexpired term of 30 years has a value of £150,000 and if it represents 60% of the full freehold value, it would follow that the full freehold value of the flat is £250,000. One of the considerations valuers use when calculating relativity is a “no Act world” assumption which means that real world evidence of the property market (which would have the benefit of 1993 Act rights) cannot be taken into account when calculating the premium as it would lead to a higher price for a lease extension or collective freehold enfranchisement.

A number of graphs of relativity have been published by established valuers to help to calculate relativity.  As most referenced relativity graphs post-date the 1993 Act, an alternative “no Act world” option was offered by the so-called Parthenia model as it is based on analysis of property values between 1987 to 1991.

The decisions

At first instance, the Upper Tribunal considered numerous graphs referenced when calculating relativity. The Parthenia model was rejected entirely as when applied to one of the flats in the case, the price payable with a “no Act world” arrived at a higher price than a price payable with the benefit of the 1993 Act.  The Parthenia model was therefore “a clock which strikes thirteen”.

Whilst other established graphs were also criticised, it was suggested that the Gerald Eve Graph or Savills 2002 should be used as cross references when calculating relativity.  It was recommended however that a starting point should always be the real world sale of leasehold flats rather than relatively graphs.  This decision meant that the leaseholders would be paying a higher price for exercising their rights under the 1993 Act and the appeal was made on the grounds that the Parthenia model should not have been rejected by the Upper Tribunal. However, the Court of Appeal dismissed the appeal  concluding that the Upper Tribunal were entitled to rule out the future use of the Parthenia model and noting that the Government has asked the Law Commission to consider the simplification of valuations under the 1993 Act.  It may be  therefore, that the holy grail will one day be found.

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