Leasehold Relativity: life after Parthenia
The long-awaited decision of the Upper Tribunal in the case of Trustees of the Sloane Stanley Estate v Mundy  UKUT 223 was delivered in early May 2016. At issue in that case was the correct method for calculating the marriage value element of the premium payable for a lease extension under the Leasehold Reform, Housing and Urban Development Act 1993. For several years there had been argument as to how, for the purposes of arriving at marriage value, one should calculate the existing lease value relative to market value (relativity), upon the statutory assumption that the existing lessee has no statutory right to renew.
Tenants contending for a higher value for the existing lease (resulting in lower marriage value) had been relying on the so-called Parthenia model. This used pre-1993 Act data purporting to show relativity in a “no-Act” world. Unfortunately for the tenants in the Sloane Stanley case the Parthenia model produced an “impossible” result in that the open-market value of the leasehold property was shown to be lower than the “no-Act” value. In the opinion of the valuers who gave evidence on behalf of the landlords, “Act rights” have a value so that the market value of a property without rights must be less. The Upper Tribunal concluded that “the Parthenia model is a clock which strikes 13… It cannot be relied upon” and must be rejected.
The Upper Tribunal declined to lay down any definitive test as to how leasehold relativity should be determined in future cases. However, the Tribunal did provide some guidance as to those matters which might be of use as follows:
- One must focus on the actual market evidence at the relevant date of claim, even if that evidence might be suspect.
- Evidence of past performance in the market is not always conclusive.
- A useful starting point is an actual market transaction involving the existing lease with rights under the Act. The proper amount of the deduction to reflect the absence of rights is then a matter for expert valuation opinion.
- In the absence of a relevant market transaction valuers may have to adopt more than one approach.
- The relativity graphs traditionally relied on by valuers were arguably out of date and there was a need for an up-to-date graph based on contemporary market evidence.
The Upper Tribunal said that they would have liked to arrive at a method of valuation which would be “clear and simple and predicable as to its future application to determine the relativities for leases without rights under the 1993 Act”. The only certainty that resulted from this decision was that the Parthenia model was not to be used in future. No “clear and simple” solution has been endorsed in its place.
Since the decision was handed down there have been two significant developments. Firstly, an Application for permission to appeal has been lodged and a decision on this is awaited. Secondly, in response to the Upper Tribunal’s suggestion that an up-to-date graph could be helpful to valuers, Savills have produced modernised graphs and tables based on nearly 6,000 sales of leasehold flats, analysed using the hedonic regression method. It remains to be seen how helpful Tribunals and valuers find this when assessing relativity.
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