Leaseholders who exercise their right to acquire a new (extended) lease of their flat under the Leasehold Reform, Housing and Urban Development Act 1993 must pay a premium to their landlord.
Where the existing lease has an unexpired term of less than 80 years, that premium will include ‘marriage value’.
To calculate marriage value, it is necessary to determine the value of the interest of the lessee under the existing lease and the value of the interest of the lessee under an extended lease.
That difference is sometimes expressed as a percentage, known as ‘relativity’. The greater the difference, the greater the marriage value.
The difficulty is that the short lease value must be arrived at on the assumption the 1993 Act confers no right to a new lease.
A number of graphs claiming to show relativity have been produced by valuers over the years and applied by the Leasehold Valuation Tribunal/First Tier Tribunal and Upper Tribunal (UT), but they are far from perfect, and disputes about remain.
Enter Dr Bracke, who used a statistical model known as hedonic regression to analyse data of actual sales between 1987 and 1991.
That model has been particularly popular with leaseholders, because it results in a much higher relativity (and hence, lower premiums). However, aside from Kosta, it has remained untested in any court or tribunal capable of setting a judicial precedent. Until now.
Unfortunately for the lessees, in Trustees of the Sloane Stanley Estate v Mundy [2016], the Parthenia model resulted in a ‘no Act’ figure for one of the flats which was higher than the actual value of the existing lease with 1993 Act rights.
This was fatal, and exposed the model’s flaws, considered in the decision: “The Parthenia model is a clock which strikes 13… If a clock strikes 13 it is broken… It cannot be relied upon as a reliable means of telling the time even when it strikes an hour, such as 11 or 12, which are possible times of day.”
So what then, for relativity? The starting point should be market transactions of flats with rights under the 1993 Act, to which a ‘no Act’ deduction can be applied. An experienced valuer should be able to provide a figure.
In more difficult cases where there are no reliable market transactions, the valuer should use and compare a combination of methods. Two methods were suggested by the UT:
- Use the most reliable graph to determine the relative value of an existing lease with 1993 Act rights and then make a ‘no Act’ deduction. The Savills 2015 graph might work when criticisms set out in the decision are addressed.
- Use the most reliable graph to determine the value of an existing lease without rights under the 1993 Act. The decision contains an analysis of the main graphs used in PCL, of which the Gerald Eve graph was accepted as the industry standard.
Roger Hardwick is a solicitor at Brethertons
