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Bad news for leaseholders as Appeal Court backs estate owners

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Thu 25 Jan 2018

Bad news for leaseholders as Appeal Court backs estate owners

Home owners seeking lease extensions may now have to pay more as a result of a controversial judgement handed down by the Court of Appeal. 

The case was Mundy v The Trustees of the Sloane Stanley Estate, brought by chartered surveyor James Wyatt who is a former head of valuations at Countrywide’s John D Wood estate agency.

His own firm, Parthenia Valuations, created mathematical models determining lease extension costs which challenged those of the major estate owners.

Had Wyatt’s models been used as the basis for the costs for extensions for properties with less than 80 years remaining on their leases, some owners would have had to pay as much as 31 per cent less than under the estates’ calculations. 

An estimated 2.1m homes in England and Wales have leases of less than 80 years. 

However, the decision went against Wyatt, to the dismay of campaigners.

Louie Burns, managing director of Leasehold Solutions, says: "This verdict is an absolutely devastating outcome for leaseholders up and down the country, not just those living in prime central London. 

"The court's decision to uphold a lower relativity in leasehold valuations means that freeholders will receive even more money from leaseholders, as leaseholders will now be forced to pay more for their lease extensions – to the tune of many millions of pounds. 

"The valuations model at the heart of this case estimates that leaseholders are currently being overcharged by £480 million a year. Over the past two decades that's a staggering £9.6 billion that has been taken from householders due to flawed valuation methods that have favoured freeholders at the expense of leaseholders." 

The specifics of the test case before the Court of Appeal involved a flat in Chelsea with 23 years left to run on the lease.  

 

John Stephenson, head of leasehold enfranchisement at Bircham Dyson Bell - which represented the appellant - has provided this background.

The issue that arose in the case was how to calculate the premium for a lease extension in cases where the lease has less than 80 years unexpired. This is done in part by calculating the value of the tenant’s interest in the flat with the present lease (but excluding statutory rights to extend) as a percentage of the freehold interest (“relativity”).  

Calculating relativity and the effect of excluding statutory rights is complex and involves an assessment of comparable market sales of flats. The assessment has hitherto been mainly done by reference to so called “relativity graphs” the most frequently quoted of which was produced by surveyors, Gerald Eve, over 20 years ago on instructions from the Grosvenor Estate. 

In the absence of other credible methods to assess relativity, the Gerald Eve graph has been adopted by surveyors and tribunals alike as the industry standard but leaseholders have long felt that it no longer represents a fair way to assess relativity.     

In 2016, Mr Mundy [the leaseholder] offered in the Upper Tribunal an alternative model to calculate relativity known as hedonic regression which involved analysis of statistical data from nearly 8,000 open market transactions of houses and flats between 1987 and 1991 with adjustment for length of lease. 

His attempt failed even though the Tribunal accepted that relativities for leases have changed over the years. Mr Mundy then appealed to the Court of Appeal but the court has now again rejected the hedonic regression model in its judgment.