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31st January 2018

Leasehold Extensions: Bad News for Leaseholders

The Leasehold Reform, Housing and Urban Development Act 1993 (the Act) gives long leaseholders the option to extend their leases on payment of a premium provided that certain criteria are satisfied. Although the Act outlines the factors which will be considered when calculating the premium, there has been a long running debate as to the appropriate method through which to attribute a financial value to each of these elements. Furthermore, many long leaseholders have long felt that they have been paying significantly over the odds in order to secure an extension to their lease as a result of the various methods used, so the outcome of the recent Court of Appeal judgment in Mundy v Trustees of the Sloane Stanley Estate [2018] (EWCA Civ 35) was being watched with particular interest.

Background

In the Mundy case, the property in question was a flat located in Chelsea with 23 years left to run on the existing lease. The freeholder, the Sloane Stanley Estate, sought a £420,000 premium in order to agree an extension with the long leaseholder. Unhappy with the value of the premium which was being sought, the long leaseholder initially applied to the Upper Tribunal for a determination of the premium payable.

At the Upper Tribunal, the leaseholder proposed an alternative method for calculating the value of his interest in the flat as a percentage of the freehold interest. The Upper Tribunal held that the proposed model was unsuitable for use in determining lease extension premiums, prompting the leaseholder to appeal to the Court of Appeal.

 

The Appeal

The particular ground of appeal centred on the appropriate method through which to value the leaseholder’s existing leasehold interest in the flat whilst excluding the benefit of the leaseholder’s statutory right to a leasehold extension under the Act. This concept is known as ‘relativity’. The ‘relativity’ value would form part of the overall calculation of the premium which he would need to pay to the Sloane Stanley Estate in order to secure a lease extension under the Act.

The method proposed by the leaseholder, known as the Parthenia model, uses hedonic regression analysis. In practical terms, this methodology attributes a value to the length of the lease for a leasehold property based on the rates achieved in market transactions which took place between the years 1987 to 1991. The key point to note is that these parameters took into account data from transactions which occurred prior to the Act coming into force. In comparison, the standard industry approach has typically been to rely upon ‘relativity graphs’ which measure the relationship value between a lease of a particular length and the freehold in question. Whilst these graphs are not infallible (and receive their fair share of criticism), the graph produced by Gerald Eve (a firm of property consultants) has proved to be the graph which is typically relied upon throughout the property industry.

The Court of Appeal affirmed the earlier decision of the Upper Tribunal, holding that ‘the [Upper Tribunal] was within the scope of its functions in ruling out future use of the Parthenia model in its current form.’ In making this decision, the Court of Appeal pointed to a number of problems with the Parthenia model. One pertinent example referred to by the Court was that the Parthenia model was found to have provided an erroneous result when applied to a lease in the same block of flats as the property in question: it gave a higher value to the lease without taking into account the rights which were given under the Act (in relation to renewal) than the same lease with rights of renewal under the Act. This result occurred despite it being common ground by both parties that a lease ‘with Act rights’ (that is, a lease which grants a right to long leaseholders the option to extend their leases) is worth more than a lease without the right to seek an extension.

 

Comment

Whilst it is clear that the Gerard Eve graph and the other ‘relativity graphs’ are far from ideal, the resounding view of the Court of Appeal to rule out future use of the Parthenia model (at least in its current form) suggests that the Courts are very much in favour of applying a ‘real world’ approach to valuations with adjustments, where necessary, to take into account the benefit which rights under the Act would typically add to the valuation of a lease. For the mean time, long leaseholders will continue to face significant sums in order to extend their leases until an appropriate method of valuing lease extensions is finally cracked.

For more information please contact Kate either Church by clicking here or contact Lauren Coote by clicking here.